WEBVTT

NOTE Price Controls: Case Studies

1
00:00:00.000 --> 00:00:07.440
What I want to do is continue with the discussion of supply-demand and move on to the long run, okay?

2
00:00:07.440 --> 00:00:12.920
That is, what influences the shifts of the supply curves?

3
00:00:12.920 --> 00:00:21.080
Okay, well, as I mentioned, there could be one-time events that occur that cause the supply curve to shift to the right or to the left,

4
00:00:21.080 --> 00:00:27.840
but there's also an effect that occurs after prices rise, okay?

5
00:00:27.840 --> 00:00:34.840
If there's an increase in demand and prices rise, entrepreneurs realize that they're earning more profit.

6
00:00:34.840 --> 00:00:45.840
And if they expect the increase in demand to persist over time, what they're going to do is begin to shift resources into that industry in which prices have increased.

7
00:00:45.840 --> 00:00:51.840
So, over time, you're going to have new firms entering the industry and old firms expanding.

8
00:00:51.840 --> 00:00:56.840
And that's going to shift, step by step, the supply curve to the right.

9
00:00:56.840 --> 00:01:26.480
An example might be a situation in which there was an increase in the demand for SUVs early in the 90s, prices shot up, there weren't that many SUVs on the road, but eventually what happened, over time more SUVs, I forget who really marketed the first SUV but other companies began to come in and market SUVs and also companies that were already selling SUVs expanded their supply.

10
00:01:26.480 --> 00:01:31.380
So, over time, what happened was that there was an increase in supply and the price tended to fall, okay?

11
00:01:31.380 --> 00:01:36.580
And it tended to fall to a point where all profits were wiped out, again, in that industry.

12
00:01:36.580 --> 00:01:43.580
So, we're going to talk about entrepreneurs and profits tomorrow, but for now, keep in mind that whenever there are any profits in an industry,

13
00:01:43.580 --> 00:01:56.280
and by profit, by pure profit, or entrepreneurial profit, we mean any excess return above the rate, going rate of return throughout the economy.

14
00:01:56.280 --> 00:02:02.840
So if the going rate of return throughout the economy on investment, which represents people's time preferences, that's five percent.

15
00:02:02.840 --> 00:02:09.360
If rates of return in one industry shoot up to ten or fifteen percent, you're going to see supply expanding over time.

16
00:02:09.360 --> 00:02:14.100
So let me just give you an analysis of this. I'll give you some examples.

17
00:02:14.100 --> 00:02:21.100
What I want to do first is give you a graphical analysis.

18
00:02:21.100 --> 00:02:32.100
Let's go down a little bit. This is Murray Rothbard's graph, so I want to just go down a little bit.

19
00:02:32.100 --> 00:02:46.100
Okay, and let's assume that we start at the point A there, okay, so price is 0x, 0x or 0x, and certain quantity is being sold.

20
00:02:46.100 --> 00:02:50.100
And suddenly demand increases. So demand increases from D to D prime.

21
00:02:50.100 --> 00:02:57.100
As demand shifts to the right, there's a temporary shortage and prices begin to be bid up.

22
00:02:57.100 --> 00:03:04.100
Prices then rise all the way up to Y. So prices are now zero Y, much above zero X.

23
00:03:04.100 --> 00:03:10.100
Now, that's what happens in the immediate run. There's a momentary equilibrium.

24
00:03:10.100 --> 00:03:17.860
But at that price, high price of Y, producers in that industry are earning higher profits.

25
00:03:17.860 --> 00:03:21.600
So what's going to happen? What's going to happen is that they're going to begin to allocate additional resources.

26
00:03:21.600 --> 00:03:27.900
They're going to begin to bid up prices of inputs in other areas, bid them away from other areas, and move them into that area, okay?

27
00:03:27.900 --> 00:03:32.000
So we might think of the shift to red wine for health reasons, okay?

28
00:03:32.000 --> 00:03:41.600
Eventually, first the demand shifts up, price of red wine skyrockets, and over time more and more vineyards turn to producing red wine.

29
00:03:41.600 --> 00:03:55.900
So over time what happens is that the market demand curve shifts to the right, okay, and price begins to fall, until you find at some point prices fall, let's say, to Z, still above the old price,

30
00:03:55.900 --> 00:04:00.900
But at point Z, there is what we might call a new final state of rest.

31
00:04:00.900 --> 00:04:03.300
Now that's a term we haven't used, the final state of rest.

32
00:04:03.300 --> 00:04:07.700
Let me just explain that term and then we'll come back to the analysis.

33
00:04:07.700 --> 00:04:15.500
In a final state of rest, we assume that the economy is in a situation in which production has been completely adjusted

34
00:04:15.500 --> 00:04:20.300
throughout the economy to consumers' most highly valued ends.

35
00:04:20.300 --> 00:04:23.300
There can be no change in production that benefits consumers.

36
00:04:23.300 --> 00:04:37.700
So that means that there is no profit anywhere in the economy, in every industry, in every stage of every production process, producers are earning the going rate of return, 5% or 10%.

37
00:04:37.700 --> 00:04:43.300
So we start from that point, so that's final state of rest one right there, point A.

38
00:04:43.300 --> 00:04:50.500
This is just one of many goods in which everyone is earning the going rate of return which reflects time preference.

39
00:04:50.500 --> 00:05:01.500
Demand shoots up. We allow one change. Sometimes this is called comparative statics by the mainstream, but it's better to call it a final state of rest analysis.

40
00:05:01.500 --> 00:05:08.500
So there's one change in the data, and that is people's value scales for red wine change. We allow that to change.

41
00:05:08.500 --> 00:05:20.500
And then what we do with this analysis, we use this analysis to trace out all the effects of that change on the economy until the economy is in a second final state of rest.

42
00:05:20.500 --> 00:05:31.500
So what we have then is various resources shifting out of, it might take a year, it might take two, it could take five years, away from white wine, away from other types of beverages,

43
00:05:31.500 --> 00:05:36.500
and the demands for which have fallen because people now value red wine more highly

44
00:05:36.500 --> 00:05:40.500
and the shift of those resources into the red wine industry.

45
00:05:40.500 --> 00:05:44.500
That takes a number of years. We don't allow anything else to change during that period

46
00:05:44.500 --> 00:05:47.500
so that we can understand the full effects.

47
00:05:47.500 --> 00:05:49.500
Does that really happen in the real world?

48
00:05:49.500 --> 00:05:51.500
Do things change one at a time? No, of course not.

49
00:05:51.500 --> 00:05:56.500
Changes are always occurring from day to day in all parts of the industry.

50
00:05:56.500 --> 00:06:00.500
But what this analysis allows us to do is to isolate one change

51
00:06:00.500 --> 00:06:03.900
to find out how the economy adjusts to that change, okay?

52
00:06:03.900 --> 00:06:06.100
So now we're at point B, okay?

53
00:06:06.100 --> 00:06:09.140
At point B, if there's no further change,

54
00:06:09.140 --> 00:06:10.700
the economy is completely adjusted.

55
00:06:10.700 --> 00:06:12.860
There's now more red wine being produced

56
00:06:12.860 --> 00:06:14.540
in response to consumer demand,

57
00:06:14.540 --> 00:06:16.940
and this is the idea of consumer sovereignty,

58
00:06:16.940 --> 00:06:20.180
and less of other beverages, okay?

59
00:06:20.180 --> 00:06:23.620
Resources in red wine, price of red wine is higher.

60
00:06:23.620 --> 00:06:27.060
Those types of labor that specialize in producing red wine,

61
00:06:27.060 --> 00:06:28.860
they have higher wage rates.

62
00:06:28.860 --> 00:06:30.460
Other types of labor in other industries

63
00:06:30.460 --> 00:06:37.460
They're specific to other industries, other types of land have lower rents and lower wage rates, okay. So the whole economy has adjusted.

64
00:06:37.460 --> 00:06:57.460
So when then, one of the effects, one of the causes of a shift to the right in the supply curve is when there is a belief that a demand curve will persist, a shift in demand to the right will persist, that is higher prices and profits or other things equal will persist.

65
00:06:57.460 --> 00:07:04.460
And then you get a large influx or an influx of entrepreneurs into that industry, okay?

66
00:07:04.460 --> 00:07:09.460
Now, if there was another demand, increase in demand for red wine, okay?

67
00:07:09.460 --> 00:07:17.460
Let's say from D, and here is D double prime, from D prime to D double prime, you have the same thing occurring, okay?

68
00:07:17.460 --> 00:07:24.460
You'd have, this should intersect now with this new supply curve, right? I didn't bring it up far.

69
00:07:24.460 --> 00:07:37.460
At a much higher price, the supply curve would shift to the right because of the higher profits that are being earned, price would fall and finally come to rest, a final state of rest, where there's no further change at point C.

70
00:07:37.460 --> 00:07:45.460
This is the theory of consumer sovereignty. This shows how the price system serves consumers.

71
00:07:45.460 --> 00:07:48.340
It's not ultimately entrepreneurs making these decisions.

72
00:07:48.340 --> 00:07:52.220
Entrepreneurs are making the decisions to expand supplies of, let's say, SUVs

73
00:07:52.220 --> 00:07:59.140
and reduce supplies, let's say, of station wagons and large sedans, which occurred in the 1990s and 2000s,

74
00:07:59.140 --> 00:08:02.140
precisely because consumers have shifted their demand.

75
00:08:02.140 --> 00:08:09.260
So it's what the law of consumer sovereignty tells us, and it might also be called the law of long-run supply.

76
00:08:09.260 --> 00:08:19.060
What that tells us is that it is the consumer demand that directs the allocation of resources in the economy.

77
00:08:19.060 --> 00:08:30.660
One last point I want to make before I give you some examples and that is this line which I've labeled the long run supply curve is simply a nexus of points.

78
00:08:30.660 --> 00:08:35.900
Every point on this line represents a final state of rest.

79
00:08:35.900 --> 00:08:43.700
And that point will manifest itself if the demand curve shifts out to that point, all right?

80
00:08:44.700 --> 00:08:48.700
Does it exist in the real world? No, it doesn't. It's a tool of analysis.

81
00:08:48.700 --> 00:08:51.100
That long-run supply curve doesn't exist in the real world.

82
00:08:51.100 --> 00:08:56.300
What does exist in the real world? These immediate-run market-date supply curves.

83
00:08:56.700 --> 00:09:00.100
They're always moving in the direction determined by consumer demand,

84
00:09:00.100 --> 00:09:02.900
but before they ever get to the final state of rest, what happens?

85
00:09:02.900 --> 00:09:08.900
Something else changes. There's changes in other industries. The demand for vodka goes up.

86
00:09:08.900 --> 00:09:13.900
And so you get other changes. So in the real world we have continual changes.

87
00:09:13.900 --> 00:09:19.900
But if you stop those changes for a moment and allow them to follow themselves through,

88
00:09:19.900 --> 00:09:22.900
all adjustments to follow through in response to those changes,

89
00:09:22.900 --> 00:09:28.900
you would always get the economy coming to rest at some long run final state of rest.

90
00:09:28.900 --> 00:09:35.900
And that allows us to trace out, as I mentioned before, the effects, the long run effects of any change.

91
00:09:35.900 --> 00:09:42.900
When price goes up, that's not the end of it. The increase in demand does increase price, but it causes all of these other effects in the market economy.

92
00:09:42.900 --> 00:09:51.900
This analysis explains what happened to mainframe computers.

93
00:09:51.900 --> 00:10:21.900
and Computers. In the early 1980s, late 70s, early 80s, IBM had the technology to produce personal computers. Yet, the president of IBM made a statement, which of course he would later live to regret, and that was that personal computers were household toys. They would be useful, a few would be sold to households because kids would want to play games on these computers. They would not find anyone

94
00:10:21.900 --> 00:10:51.900
This is widespread use in business. In fact, he was completely wrong. What happened? As the technology developed, as PCs were introduced, the demand shifted to the right for PCs, shifted to the left for mainframes, and you got a new state of rest, where the demand for mainframes shrunk tremendously, and the demand for PCs shifted to the right. At the same time, the supply curves of PCs were shifting for another reason, which we'll talk about in a moment.

95
00:10:51.900 --> 00:11:05.900
When it came to GM, which suffered massive losses, they continued to produce automobiles that consumers here in the U.S. at least didn't believe compared well with similarly priced Japanese automobiles.

96
00:11:05.900 --> 00:11:18.900
So as I mentioned, last year they lost $10.6 billion. So that was a result of consumer sovereignty, a shift to the left in the demand curve for GM vehicles, shift to the right for various Japanese substitutes.

97
00:11:18.900 --> 00:11:25.500
Okay. A couple of interesting examples of this law of long-run supply, okay.

98
00:11:25.500 --> 00:11:31.500
Here though, it's really not the consumer that's operating, but it's a government, but let me explain what I mean.

99
00:11:31.500 --> 00:11:43.800
Back in 1973, after OPEC was formed and an embargo was put on the West in which, and as a result, the price of oil rose,

100
00:11:43.800 --> 00:11:53.120
There was talk that the West should put an embargo on wheat and other agricultural products to the Middle East countries like Saudi Arabia.

101
00:11:53.120 --> 00:11:56.480
It never occurred, this sort of reverse embargo.

102
00:11:56.480 --> 00:12:03.040
But the talk about that caused the Saudi government to react.

103
00:12:03.040 --> 00:12:06.520
They wanted to produce, they wanted to become self-sufficient in wheat.

104
00:12:06.520 --> 00:12:12.040
Right now, it's a desert country, it's very, very expensive to irrigate.

105
00:12:12.040 --> 00:12:15.480
How could they get their farmers to plant wheat?

106
00:12:15.480 --> 00:12:19.960
The world price was back then, I think, 85, I didn't bring the clipping, it was something like

107
00:12:19.960 --> 00:12:23.600
$85 a ton for wheat.

108
00:12:23.600 --> 00:12:25.900
Well, guess what happened?

109
00:12:25.900 --> 00:12:27.400
The Saudi government

110
00:12:27.400 --> 00:12:28.240
became,

111
00:12:28.240 --> 00:12:31.320
or Saudi Arabia became self-sufficient

112
00:12:31.320 --> 00:12:32.360
in the production of wheat.

113
00:12:32.360 --> 00:12:34.720
Not only self-sufficient, they began to export wheat.

114
00:12:34.720 --> 00:12:37.140
Well, how did they get their farmers to grow all this wheat?

115
00:12:37.140 --> 00:12:40.280
They simply allowed, they simply

116
00:12:40.280 --> 00:12:47.920
subsidized the growing of wheat to the tune of $1,000 per bushel, compared to $85 per bushel.

117
00:12:47.920 --> 00:12:51.680
That more than covered the irrigation costs and returned a profit to farmers.

118
00:12:51.680 --> 00:12:56.120
So what happened? They moved out along this long-run supply curve and they produced a tremendous amount of wheat.

119
00:12:56.120 --> 00:13:04.560
Now, I don't know what's happened since then to that, but you can see, I mean, you know, at $1,000, $2,000 the U.S. government offered that.

120
00:13:04.560 --> 00:13:08.040
We'd all be out in our backyards planting wheat, right?

121
00:13:08.040 --> 00:13:13.240
You have a tremendous movement of, this shows a tremendous movement of resources into an area when the price goes up.

122
00:13:13.240 --> 00:13:18.640
But it doesn't happen immediately. It happens over time. That's why we use the long run supply curve.

123
00:13:18.640 --> 00:13:29.540
Another example which I have is that of the embargo that the U.S. placed on Haiti before it invaded Haiti back in the 1990s

124
00:13:29.540 --> 00:13:39.540
to throw out or to impose sort of the democratic decision for Aristide, who had won an election.

125
00:13:39.540 --> 00:13:53.540
And what was interesting was that the U.S. embargo caused an interruption in the supply of oil products to Haiti,

126
00:13:53.540 --> 00:14:03.540
And prices of gasoline in Haiti shot up to something like 65, this is a poor country, 65 dollars per gallon, okay.

127
00:14:03.540 --> 00:14:11.540
However, the market operated. What happened was that at that high price, it became very profitable to sell gasoline in Haiti.

128
00:14:11.540 --> 00:14:16.540
So you had a lot of smugglers who were taking risks and slipping through the U.S. embargo.

129
00:14:16.540 --> 00:14:25.540
And so what you found after a while was that the price had fallen down to something like, you know, $6, okay, from something like $65.

130
00:14:25.540 --> 00:14:34.540
And what was interesting was that the U.S. Embassy, our embassy there, could not get gasoline because of this embargo.

131
00:14:34.540 --> 00:14:40.540
So they, too, turned to the black market. They began buying from smugglers, okay.

132
00:14:40.540 --> 00:14:50.540
It says even the U.S. Embassy, like other diplomatic missions, has resorted to black market fuel after the military frustrated efforts to bring a tanker truck across the border for diplomatic use.

133
00:14:50.540 --> 00:14:58.540
So smuggling is always defeated, I'm sorry, embargoes never work completely right.

134
00:14:58.540 --> 00:15:07.540
They're generally defeated by the heroic smugglers who are reacting to the much higher price, and that's consumer sovereignty operating.

135
00:15:07.540 --> 00:15:22.540
And then I did mention to you the fact that there was a submarine built in the Andes Mountains in Colombia in response to cutting off other means of transporting cocaine to the US.

136
00:15:22.540 --> 00:15:31.540
The war against, very interesting, the war against drugs really is a war that can never be won because it's a war that attacks the supply side.

137
00:15:31.540 --> 00:15:35.540
And the supply side simply responds to demand.

138
00:15:35.540 --> 00:15:44.540
So, if you cut off one source of supply, all you succeed in doing is raising the cost even higher by making the good scarce, okay?

139
00:15:44.540 --> 00:15:56.540
So, if you choke off the import of cocaine from one source, from, let's say, Latin America, you're going to find, and we did find, that people begin growing poppies

140
00:15:56.540 --> 00:16:04.540
and then processing it into hard drugs in the Middle East and then smuggling it in.

141
00:16:04.540 --> 00:16:10.540
Okay? So, the only, I mean, politicians still haven't realized that the only way you can win a war against drugs is on the demand side, okay?

142
00:16:10.540 --> 00:16:16.540
When people's value scales change and the demand curve falls all the way to the left, what happens?

143
00:16:16.540 --> 00:16:21.540
The drug cartels just fall apart. In fact, the U.S. has created the drug cartels.

144
00:16:21.540 --> 00:16:29.540
The demand for drugs, as most economists believe, though there's been some studies that have cast some doubt on this, but the demand for drugs tends to be inelastic.

145
00:16:29.540 --> 00:16:38.540
So the more the U.S. government reduces the supply, the higher the total revenue that the drug smugglers earn.

146
00:16:38.540 --> 00:16:44.540
What happens is that the smaller drug smugglers who can't get protection from local governments and so on,

147
00:16:44.540 --> 00:16:51.540
who can't get a private army to protect their drug assets, they go out of business.

148
00:16:51.540 --> 00:16:55.540
So it's only the larger cartels that can exist in this area where there's a war,

149
00:16:55.540 --> 00:17:03.540
There's a little war going on where you have U.S. advisors in Colombia fighting against drugs.

150
00:17:03.540 --> 00:17:08.540
So they're creating these cartels with these weapons and so on, and they're financing them.

151
00:17:08.540 --> 00:17:16.540
The more you restrict the supply along an elastic demand curve, the higher the total revenue is.

152
00:17:16.540 --> 00:17:20.540
The more money they have to pay off the police and the government and so on.

153
00:17:20.540 --> 00:17:33.540
So, it's really this war on the supply side of the drug market, or against the supply side, that has created the drug cartels and keeps them in business, unfortunately.

154
00:17:33.540 --> 00:17:36.540
Okay. Yes. Alex, you had a question. Do you want to ask it?

155
00:17:36.540 --> 00:17:59.540
When it comes to Cuba's concerns, there's an embargo on Cuba, but there are many Cubans in the Miami community that smuggle a lot of things that can't go into Cuba like medicine and food and different things that the US restricts Cuba. So that happens a lot in Cuba, too, where they make profits by selling it to them in the black market in Cuba.

156
00:18:06.540 --> 00:18:31.540
It's a fertile market then for certain goods that are being embargoed and that then stimulates the smugglers to bring them in either for altruistic reasons because their family is there or for profit motives or families that want to send things back to their family in Cuba that they can't get because of the embargo will engage smugglers to do the business for them.

157
00:18:31.540 --> 00:18:34.540
So that's a good point, Alex.

158
00:18:34.540 --> 00:18:51.540
Okay, now I want to make another point. In the long run then, or actually before we get to that point, there's one other thing that does shift the supply curve to the right, sort of a long run influence that's always operating.

159
00:18:51.540 --> 00:18:57.540
And that is the fact that people are continually saving and investing money in new and better capital goods.

160
00:18:57.540 --> 00:19:01.540
And a lot of this investment also goes into research and development of new technology.

161
00:19:01.540 --> 00:19:06.540
So with new technology coming on the market, embodied in new and better capital goods,

162
00:19:06.540 --> 00:19:11.540
even with the same amount of laborers, what happens is that you get an increase in supply,

163
00:19:11.540 --> 00:19:14.540
because the cost of production fall.

164
00:19:14.540 --> 00:19:19.540
So take, for example, the hand calculator.

165
00:19:19.540 --> 00:19:26.540
That came on the market $350 back in the early 1970s, and there may have been some profit there.

166
00:19:26.540 --> 00:19:30.540
But as you got competition, the price began to come down.

167
00:19:30.540 --> 00:19:37.540
But at some point, with the given technology, the profits are wiped out, let's say, you know, when it's $200.

168
00:19:37.540 --> 00:19:45.540
The only way to continually make new profits is to find new and better ways, less costly ways of producing hand calculators.

169
00:19:45.540 --> 00:19:47.540
Same thing is true of PCs.

170
00:19:47.540 --> 00:19:55.540
So the supply curve can also shift to the right independently of an increase in demand as a result of a change in cost conditions.

171
00:19:55.540 --> 00:20:05.540
When new technology comes in and more and better capital goods make labor more productive, the unit costs of producing these things falls.

172
00:20:05.540 --> 00:20:17.540
So now if you have a fixed demand curve, so just focus on D' and cost fall, you'll have these curves shifting to the right along the same demand curve and prices falling.

173
00:20:17.540 --> 00:20:26.540
So prices for PCs fell from let's say Y represents $20,000 all the way down to somewhere down here to $500.

174
00:20:26.540 --> 00:20:34.540
That was done because or that resulted from the tremendous improvement in technology that occurred in the 80s and 90s.

175
00:20:34.540 --> 00:20:43.540
So then the question becomes if a free market economy or economy that depends heavily on the market such as the US economy

176
00:20:43.540 --> 00:21:02.540
which allows the market a great deal of freedom. If the natural tendency is for new technology to come in and new and better capital goods to be produced and integrated into the economy, why don't we see prices of all goods falling?

177
00:21:02.540 --> 00:21:12.540
Why is it that only prices of certain high-tech goods, cell phones, PCs, iPods, why have only those prices been falling in the long run?

178
00:21:12.540 --> 00:21:20.540
Well, what else is occurring? What else occurs day after day after day, literally?

179
00:21:20.540 --> 00:21:25.540
It happens in New York City at the open market desk of the Fed.

180
00:21:25.540 --> 00:21:27.540
Well, the Fed is continuously printing new money.

181
00:21:27.540 --> 00:21:36.540
So you have two competing influences on long-run prices, at least since World War II.

182
00:21:36.540 --> 00:21:56.540
And that is the printing press, which is always shifting demand curves to the right, pushing prices up, and saving investment in new technology that's being provided on the market, that's always shifting supply curves to the right, tending to push prices down.

183
00:21:56.540 --> 00:22:04.540
So in some industries where the market is winning, such as in high-tech industries, you get this situation.

184
00:22:04.540 --> 00:22:08.540
This is the computer industry as an example.

185
00:22:08.540 --> 00:22:19.540
Even though demand curves are shifting to the right because the U.S. government is relentlessly printing more and relentlessly printing additional money and creating new money,

186
00:22:19.540 --> 00:22:28.540
Supply curves are shifting to a greater extent, so therefore the trend of prices in many high-tech industries is downward.

187
00:22:28.540 --> 00:22:34.540
And by the way, this graph represents the trend in the 19th century, throughout the 19th century.

188
00:22:34.540 --> 00:22:41.540
Prices continually fell except during wartime in the U.S. and British and other industrial economies.

189
00:22:41.540 --> 00:22:56.540
In fact, from 1880, which was the year after we went back on the gold standard, after the Civil War, until 1896, prices in the U.S. fell at something like 2.5% to 3% per year.

190
00:22:56.540 --> 00:23:04.540
Every year prices fell. So even if you didn't get a raise in terms of money, your real income was going up, your real wages were going up.

191
00:23:04.540 --> 00:23:13.540
And prices in 1896 were lower than they were at the beginning of the 19th century.

192
00:23:13.540 --> 00:23:19.540
So the natural trend of a market economy, which doesn't face inflation,

193
00:23:19.540 --> 00:23:24.540
let's say a market economy on a gold standard in which there is a little bit of mining of new gold,

194
00:23:24.540 --> 00:23:28.540
so therefore you do have some increase in the money demand,

195
00:23:28.540 --> 00:23:32.540
but the natural tendency is for supply to shift out and drive prices down.

196
00:23:32.540 --> 00:23:41.540
Now, after World War II, for most industries, we got something a little different, a different price trend.

197
00:23:41.540 --> 00:23:56.540
Let's take the car industry.

198
00:23:56.540 --> 00:24:00.540
You see what happens here. Even though there is some productivity going on,

199
00:24:00.540 --> 00:24:06.440
I mean, plants are becoming more mechanized, the Japanese are using, you know, robot-controlled plants,

200
00:24:06.440 --> 00:24:08.640
plants are becoming computerized and so on.

201
00:24:08.640 --> 00:24:15.340
You have supplies of cars shifting to the right, but on the other hand, okay,

202
00:24:15.340 --> 00:24:21.840
you have increase in demands for money, or increase in demand for the car, fueled by monetary inflation,

203
00:24:21.840 --> 00:24:25.940
that is outstripping the shift of supply. So the trend is what?

204
00:24:25.940 --> 00:24:28.940
Trend of Prices is upward, okay?

205
00:24:31.580 --> 00:24:32.420
Think about it.

206
00:24:32.420 --> 00:24:37.420
An automobile sold for something like $750 in 1910 dollars

207
00:24:40.540 --> 00:24:43.060
before mass production of automobiles.

208
00:24:43.060 --> 00:24:47.300
When Henry Ford introduced mass production, okay,

209
00:24:47.300 --> 00:24:49.300
through the assembly line,

210
00:24:49.300 --> 00:24:53.020
price of automobiles fell to something like $360 by 1914.

211
00:24:54.220 --> 00:24:55.620
Okay, but prices have gone up.

212
00:24:55.620 --> 00:24:57.740
Why haven't the price of automobiles gone down?

213
00:24:57.740 --> 00:25:00.420
Well, one reason is quality has gone up also.

214
00:25:00.420 --> 00:25:02.860
But still, you wouldn't expect the price of an automobile

215
00:25:02.860 --> 00:25:05.940
that you could get for $360 in 1914

216
00:25:05.940 --> 00:25:09.060
to be something like $20,000 today.

217
00:25:09.060 --> 00:25:10.700
Much of that increase in price is not

218
00:25:10.700 --> 00:25:12.660
due to the quality increase.

219
00:25:12.660 --> 00:25:16.500
Most of it is due to simply monetary inflation.

220
00:25:16.500 --> 00:25:17.340
Take men's suits.

221
00:25:17.340 --> 00:25:23.340
Men's suits cost about an ounce of gold back then, which was $20.

222
00:25:23.340 --> 00:25:53.340
And there has been some increase in productivity in men's suits. So men's suits shouldn't be more than $20, or maybe they should be a little bit more, because maybe they're better quality or something. But not much more. But a good men's suit now, or a decent men's suit now, is $300 to $400. That's a reflection of monetary inflation.

223
00:25:53.340 --> 00:25:59.340
We're going to talk about the interrelations of prices, okay?

224
00:25:59.340 --> 00:26:07.340
Goods can be related to one another in one of two ways, as substitutes or as complements, okay?

225
00:26:07.340 --> 00:26:18.340
Substitutes means that the good, to some extent, can serve the same end as another good, okay?

226
00:26:18.340 --> 00:26:29.340
In general, all goods are partial substitutes for one another, because all goods are ranked on the individual's value scale, and their marginal utilities are balanced against one another.

227
00:26:29.340 --> 00:26:46.340
So, all goods are partial substitutes for one another. However, there are some goods that are also used together. Sugar and coffee, tennis balls, tennis rackets, hamburgers and ketchup, cheese and hamburgers and so on.

228
00:26:46.340 --> 00:26:52.340
They're used together in the consumption experience. Those are known as complements.

229
00:26:52.340 --> 00:27:04.340
So let's look first at substitutes. How do the change in the price of a substitute, how does that affect the demand for other goods that substitute for it?

230
00:27:04.340 --> 00:27:11.340
Let's take the following example. Let's say, this is an actual example.

231
00:27:11.340 --> 00:27:27.340
Back in the mid-1970s, the coffee crop was not a good crop and also at the same time Brazil was trying to follow the mid-eastern nations and take charge and form a cartel for coffee producers, sort of an OPEC of coffee.

232
00:27:27.340 --> 00:27:38.340
So they began to cut back on supply of coffee. To make a long story short, price of coffee as a result of the reduction in supply shot up from $2 per pound to $5 per pound very quickly.

233
00:27:38.340 --> 00:27:48.340
What did many American consumers do? They shifted to tea, they shifted to hot chocolate and so on. They cut back on the amount of coffee they were drinking.

234
00:27:48.340 --> 00:27:55.340
Not everyone did. Some people did. Some people may have cut it out altogether and they substituted tea and hot chocolate and a number of other beverages.

235
00:27:55.340 --> 00:28:06.340
So the reduction in supply of coffee, the increase in the price of coffee resulted in an increase in the demand for substitutes for coffee.

236
00:28:06.340 --> 00:28:36.300
for Coffee, these direct substitutes for coffee, yes, we're going to talk about the elasticity of the demand curves, so in general then, when the price of a particular good rises, the demands for its substitutes increase, on the other hand, when the price of a good will fall, for example, when the price of, let's say, a video cassette recorder,

237
00:28:36.340 --> 00:28:55.340
When CD players began to fall in the 1980s, or better yet, when the price of CDs began to fall and CD players began to fall, what you found was, and you probably aren't familiar with these as I was, the demand for record albums shifted to the left, because people began shifting to CDs, which were substitutes for record albums.

238
00:28:55.340 --> 00:28:59.700
or when the price of DVD players began to fall

239
00:28:59.700 --> 00:29:04.260
and DVDs, people began to shift away from VCRs

240
00:29:04.260 --> 00:29:09.700
and VCR players.

241
00:29:09.700 --> 00:29:10.740
But now

242
00:29:10.740 --> 00:29:14.980
something comes in, an analytical point comes in, and that is the

243
00:29:14.980 --> 00:29:18.580
elasticity of demand.

244
00:29:18.580 --> 00:29:21.860
If the demand for the good whose price is falling is

245
00:29:21.860 --> 00:29:23.140
elastic,

246
00:29:23.140 --> 00:29:30.140
So when the price falls, that means people are spending more money on that good and that's what I've been implicitly assuming here.

247
00:29:30.140 --> 00:29:37.140
That money has to come from somewhere. Assuming the money supply is fixed, people then reduce their spending on substitutes.

248
00:29:37.140 --> 00:29:39.140
That is, the demand for substitutes fall.

249
00:29:39.140 --> 00:29:45.140
Now that's the usual case in a market economy. In a market economy, each good has many substitutes in the developed market economy.

250
00:29:45.140 --> 00:29:50.140
So when the price of that good falls, people tend to purchase more of that good and spend more on that good.

251
00:29:50.140 --> 00:29:55.140
If you spend less on that good, total revenue goes up and they reduce their demands for other goods.

252
00:29:55.140 --> 00:29:57.140
But sometimes it's not the case.

253
00:29:57.140 --> 00:30:03.140
It could be the case that the price of the good falls some type of food or food in general.

254
00:30:03.140 --> 00:30:05.140
The demand for food is inelastic.

255
00:30:05.140 --> 00:30:14.140
Say the price of food falls or certain food products fall and people spend less on the good at the lower price.

256
00:30:14.140 --> 00:30:19.140
In that case, even though the price of that good is falling, what happens to the demand for substitutes?

257
00:30:19.140 --> 00:30:29.140
They actually go up. The demand for other goods will rise because less money is being spent as a result of the inelasticity of demand on the good whose price is falling.

258
00:30:29.140 --> 00:30:35.140
So if the price of certain food products in general fall, people have more money to spend on other goods.

259
00:30:35.140 --> 00:30:39.140
So that results in an increase in demand for these other goods.

260
00:30:39.140 --> 00:30:51.140
But as I said, the usual case is that the demand for products are elastic in the range of prices that we're talking about because there are many other, there are substitutes for these products, okay.

261
00:30:59.140 --> 00:31:08.140
Now, let me just give you some examples of how the substitution process operates and what it actually did.

262
00:31:09.140 --> 00:31:14.980
in real cases. When the price of hand calculators fell,

263
00:31:14.980 --> 00:31:19.620
people spent a lot more on hand calculators over time, as the price came down from $350,

264
00:31:19.620 --> 00:31:24.580
what happened to the demand for slide rules, those old plastic

265
00:31:24.580 --> 00:31:28.420
sort of apparatus by which you did the same sorts of calculations

266
00:31:28.420 --> 00:31:31.780
as hand calculators? The demand fell almost to zero.

267
00:31:31.780 --> 00:31:36.420
They're not produced anymore. Same thing happened with typewriters.

268
00:31:36.420 --> 00:31:44.180
When the prices of PCs and word processing programs came down, people substituted those for typewriters.

269
00:31:44.180 --> 00:31:50.900
In fact, just yesterday, Lauren here at the Institute was in another room and I heard a strange sound coming from the other room.

270
00:31:50.900 --> 00:31:56.980
I walked in and it was a typewriter, which I hadn't heard in a while, and she's a lot younger than me, and believe it or not.

271
00:31:56.980 --> 00:32:02.500
And anyway, she says, you know, people laugh at me because I've never used one of these before.

272
00:32:02.500 --> 00:32:07.660
Typewriters are, you know, the demand for typewriters fell to the point where they're, you know, they're not produced anymore, okay?

273
00:32:07.660 --> 00:32:09.540
I don't think they're produced anymore.

274
00:32:09.540 --> 00:32:13.380
So someone in their mid-twenties has never used a typewriter, okay?

275
00:32:13.380 --> 00:32:14.780
She was typing labels.

276
00:32:14.780 --> 00:32:18.620
You've used it?

277
00:32:18.620 --> 00:32:20.180
So you will use typewriters? Okay.

278
00:32:20.180 --> 00:32:21.980
But I don't think they're, I don't think they're still produced.

279
00:32:21.980 --> 00:32:25.060
I mean, yes, go ahead.

280
00:32:25.060 --> 00:32:46.060
I have a question. Isn't there sort of like a bounce effect of crisis when new technologies fall out of fashion, like that they drop mention and they kind of rebound back up a bit? Like right now, VCRs are more than they were. You know, like, VCRs are more than they were. They don't make any money. Same with turntables, right?

281
00:32:55.060 --> 00:33:01.700
For a very specialized market, it has a very high per-unit cost, so the average cost goes up.

282
00:33:01.700 --> 00:33:06.100
Now, are you talking about nostalgia buying? In other words, people just buying older ones?

283
00:33:06.100 --> 00:33:08.820
You don't mean like collectors, you mean actual...

284
00:33:08.820 --> 00:33:14.060
You know, you go to the electronics store and they're charging more for a turntable than they did in the 80s.

285
00:33:14.060 --> 00:33:19.100
Yeah, that's because of... Well, part of it is this relentless monetary inflation,

286
00:33:19.100 --> 00:33:28.380
But besides that, there's an economies of scale effect, meaning that if you produce very small units of a good, it's likely that the per unit cost is going to be very high.

287
00:33:28.380 --> 00:33:30.780
Yeah, that's a good point.

288
00:33:30.780 --> 00:33:32.380
Okay.

289
00:33:32.380 --> 00:33:39.380
Oh, did you have a question, Patrick?

290
00:33:49.940 --> 00:33:54.140
Okay, now that also happens, that is the demand for goods that aren't produced

291
00:33:54.140 --> 00:33:56.020
any longer

292
00:33:56.020 --> 00:33:59.740
on the part of collectors, okay, and that shifts the demand curve to the right and

293
00:33:59.740 --> 00:34:12.740
and shifts their prices up and could cause their prices to increase tremendously, as we talked about with old baseball cards, the Honest Waggoner card from 1905 or 1910, that sold for over $600,000.

294
00:34:12.740 --> 00:34:18.740
Then the good becomes something a little different, its nature is different, it becomes a collectible.

295
00:34:18.740 --> 00:34:39.740
Okay, two examples I want to give you that show that the substitution effect is understood quite well when it's in the interest of producers to understand that effect in relation to getting things from government.

296
00:34:39.740 --> 00:34:44.740
What's interesting is that here in the United States we have sugar price supports.

297
00:34:44.740 --> 00:34:56.740
There's various programs that keep the price of sugar here in the United States much above the world price, including import quotas keeping out foreign sugar.

298
00:34:56.740 --> 00:35:05.740
There's about 12,000 producers of sugar, at least there was 10 or 15 years ago when I looked at these figures, they produce sugar from beets rather than from cane.

299
00:35:05.740 --> 00:35:08.740
It's a much more expensive process.

300
00:35:08.740 --> 00:35:13.740
So people here in the U.S. can pay anywhere from three to four times the world price of sugar.

301
00:35:13.740 --> 00:35:27.740
What's interesting was that the price of sugar shot up to such a high level that Coca-Cola, which had vowed that it would never change its original formula, actually substituted corn syrup, okay?

302
00:35:27.740 --> 00:35:31.740
Because corn syrup is a substitute for sugar.

303
00:35:31.740 --> 00:35:39.740
And also if you look at your candy bars and other kinds of sodas, you'll see that corn syrup is the major sweetener in those products.

304
00:35:39.740 --> 00:35:44.740
And the reason is that the price of sugar is so high that there was a substitution out of sugar.

305
00:35:44.740 --> 00:35:51.740
What is interesting is that obviously the corn syrup producers compete with these sugar producers.

306
00:35:51.740 --> 00:35:53.740
And yet they are allies.

307
00:35:53.740 --> 00:35:59.740
Whenever Congress threatens to take a new look at the sugar programs and threatens to repeal them,

308
00:35:59.740 --> 00:36:05.740
not only do the sugar producers troop down to Washington, but so do the corn syrup producers.

309
00:36:05.740 --> 00:36:22.740
And that's why. Because if controls on sugar were abolished and the price of sugar plummeted, the demand would shift away from corn syrup back to sugar and you would have a fall in demand for corn syrup and a lot of the corn syrup producers would lose money and some would go out of business.

310
00:36:22.740 --> 00:36:34.740
So that's one point. Another example. Why is it that unions whose workers tend to be highly skilled and highly paid always support an increase in the minimum wage?

311
00:36:34.740 --> 00:36:37.740
Yes, Michael.

312
00:36:37.740 --> 00:36:44.740
Right, that is to say that in terms of substitution or substitution effects, unskilled labor is a substitute for skilled labor.

313
00:36:44.740 --> 00:36:48.740
So let me give you an example.

314
00:36:48.740 --> 00:36:53.740
Let's say you have two technologies for digging a foundation for a new building.

315
00:36:53.740 --> 00:37:02.740
So, let me give you an example. Let's say you have two technologies for digging a foundation for a new building.

316
00:37:02.740 --> 00:37:07.740
Let's say in New York City you want to dig a foundation or even a smaller building.

317
00:37:07.740 --> 00:37:17.740
One is you can hire, let's say, five laborers with shovels, five unskilled laborers with shovels for eight hours each and pay them five dollars.

318
00:37:17.740 --> 00:37:44.740
Right, so that technology comes out to be $200, okay, so you have five laborers, they're getting paid, I'll put this in view in a moment, they're getting paid $5 an hour, and they're working for eight hours, we'll call that technology one, okay, the total cost of that technology is $200.

319
00:37:47.740 --> 00:37:56.740
Okay. Technology two is to get the foundation dug by using a skilled union worker working with a backhoe.

320
00:37:56.740 --> 00:38:03.740
So you hire the skilled union worker, let's say, who earns $15 an hour.

321
00:38:03.740 --> 00:38:13.740
So it's one skilled laborer earning $15 per hour for eight hours,

322
00:38:13.740 --> 00:38:32.740
plus a backhoe, a machine that helps dig the ditch, a machine that he runs, at let's say $80 an hour, I think it's what I want, yeah $80 an hour, I'm sorry $80 a day, you rent the backhoe at $80 a day.

323
00:38:32.740 --> 00:38:37.740
So, under competition, the two technologies have to be equal, okay?

324
00:38:37.740 --> 00:38:49.740
Okay, in order for the unionized firm to compete with the non-unionized firm, they have to get the ditch dug, and I'll zoom in a little bit.

325
00:38:49.740 --> 00:38:53.740
They have to get the ditch dug at the same price, okay?

326
00:38:53.740 --> 00:38:57.740
So it's very difficult, then, for the construction union to get a raise.

327
00:38:57.740 --> 00:39:02.740
Let's say they'd like to have their salaries raised to $20 an hour.

328
00:39:02.740 --> 00:39:05.740
But if they did that, they would price themselves out of the market,

329
00:39:05.740 --> 00:39:08.740
many of the unionized firms would go out of business,

330
00:39:08.740 --> 00:39:11.740
and demand would shift to non-unionized firms.

331
00:39:11.740 --> 00:39:19.740
Well, one way to get some room for raising their wage rates

332
00:39:19.740 --> 00:39:49.740
without pricing themselves out of the market is to support an increase in the minimum wage because if the minimum wage goes up to $6 an hour, the technology adding a dollar to the unskilled laborers cost, technology then for the first technology goes to $240 because you would have five laborers times $6 times eight hours, that would give you $240

333
00:39:49.740 --> 00:40:00.740
So now the demand for the non-unionized firms begins to fall off. Demand for unionized firms rise.

334
00:40:00.740 --> 00:40:09.740
So now that they're in greater demand, they can demand higher wage rates. In fact, they can get up to $5 an hour more,

335
00:40:09.740 --> 00:40:15.740
in which case they would then earn, the total cost of technology would then be $240.

336
00:40:15.740 --> 00:40:24.740
So they can push for a wage increase to $20 an hour, in which case the technology would be $240.

337
00:40:24.740 --> 00:40:32.740
So that's why unions, despite all their talk about brotherhood and worrying about their less well-paid brethren,

338
00:40:32.740 --> 00:40:37.740
why unions really support increases in minimum wages.

339
00:40:37.740 --> 00:40:41.740
And you can look back in US history and see this.

340
00:40:41.740 --> 00:40:51.740
Back in the 1950s when the minimum wage was raised, and it was raised a number of times, 50s and early 60s.

341
00:40:51.740 --> 00:40:58.740
You can recall back in the early 60s, so you wouldn't know about this, but you used to have a lot of ushers in movie theaters,

342
00:40:58.740 --> 00:41:05.740
and they would show people to their seats with flashlights. The movie theater wasn't as well lit as it is today.

343
00:41:05.740 --> 00:41:13.740
And what would happen then, what happened when minimum wages went up, those people lost their jobs because the cost of that technology was higher.

344
00:41:13.740 --> 00:41:23.740
And what they did was they installed a new technology and that is lighting that allowed people to see themselves in their seats on their own.

345
00:41:23.740 --> 00:41:32.740
That is floor lighting and other kinds of lighting off to the side of the theater that kept its sort of light while the movie was on so you could see yourself in and out of the theater.

346
00:41:32.740 --> 00:41:55.740
Also elevator operators were a big thing. If you see old movies, 30s, 40s, even to the 50s, manually operated elevators. Part of the reason why they disappeared when they did was that as the unions came in or as the minimum wage went up, what happened was that then the demand shifted to mechanized elevators, automatic elevators.

347
00:41:55.740 --> 00:42:01.740
Now, who produces automatic elevators? Skilled workers. Who services automatic elevators? Skilled workers.

348
00:42:01.740 --> 00:42:09.740
So you had unions of these people benefiting from the high minimum wage that displaced the low skilled elevator operators.

349
00:42:09.740 --> 00:42:20.740
So that's explained. That issue can be elucidated by this analysis of substitutes.

350
00:42:20.740 --> 00:42:37.740
The other type of good I want to mention is complements. Goods can be consumed together. Tennis rackets and tennis balls I mentioned, coffee and sugar, DVD players and DVDs, hamburgers and ketchup, so on and so forth.

351
00:42:37.740 --> 00:42:47.740
So what happened then to the sugar market when the supply of coffee was cut in the mid-1970s and the price of coffee rose?

352
00:42:47.740 --> 00:42:56.740
Well, since people began drinking fewer cups of coffee, the demand for sugar fell, because sugar is a complement of coffee.

353
00:42:56.740 --> 00:43:04.740
Or what happened to the demand for SUVs more recently as the price of gasoline has risen.

354
00:43:04.740 --> 00:43:13.740
The price of gasoline rises because of the cut in supply, people will then reduce the quantity of demand of gasoline,

355
00:43:13.740 --> 00:43:19.740
Gasoline, which means they'll reduce their demand for vehicles that use a lot of gasoline.

356
00:43:19.740 --> 00:43:24.740
So there's an effect on the complementary good, which is an SUV.

357
00:43:24.740 --> 00:43:27.740
So demand for SUVs fall.

358
00:43:27.740 --> 00:43:35.740
A very interesting phenomenon was when the first VCR technology or VHS technology was introduced,

359
00:43:35.740 --> 00:43:39.740
and competed with beta, but at the time when they were introduced they were very, very high priced

360
00:43:39.740 --> 00:43:43.940
and very few households had VCRs.

361
00:43:43.940 --> 00:43:47.260
And so what you saw initially when the price was high

362
00:43:47.260 --> 00:43:51.180
was that there were very, very few mom and pop rental stores

363
00:43:51.180 --> 00:43:52.700
around in the early 80s, okay?

364
00:43:52.700 --> 00:43:54.300
There were no big chains.

365
00:43:54.300 --> 00:43:58.880
But as the price of VHS technology dropped

366
00:43:58.880 --> 00:44:01.700
and more and more people began to buy VCRs,

367
00:44:01.700 --> 00:44:04.580
obviously the demand for the complement to VCRs,

368
00:44:04.580 --> 00:44:06.780
okay, video cassette recording tapes

369
00:44:06.780 --> 00:44:08.460
or video cassettes themselves,

370
00:44:08.460 --> 00:44:16.460
The demand for those things went up and you got suddenly popping up huge chains like Hollywood, Blockbuster, and so on.

371
00:44:16.460 --> 00:44:19.460
Why? Why all of a sudden do we see these huge chains all over the place?

372
00:44:19.460 --> 00:44:29.460
Because, not because the price of video cassettes fell, but because the price of video cassette recorders fell and that increased the demand for video cassettes.

373
00:44:29.460 --> 00:44:32.460
And so you had to have more stores renting them and so on.

374
00:44:32.460 --> 00:44:39.460
So, two things I want to mention about complements. First of all, the elasticity of demand is not relevant to complementary goods.

375
00:44:39.460 --> 00:44:48.460
If the price of a complement falls, if the price of a hamburger falls, and people generally eat cheeseburgers, then the demand for cheese will increase.

376
00:44:48.460 --> 00:44:52.460
Regardless of what the elasticity is for hamburgers.

377
00:44:52.460 --> 00:44:58.460
What we do know is that people will eat more hamburgers and therefore the demand for cheese will increase because they're complements.

378
00:44:58.460 --> 00:45:03.660
If it's inelastic, there will be a small increase in demand for cheese, because people are only eating a few more hamburgers.

379
00:45:03.660 --> 00:45:08.660
But if it's elastic, people will buy a lot more cheese. The demand will increase a lot more.

380
00:45:08.660 --> 00:45:15.060
Secondly, about complements, remember all goods are substitutes to some extent, even though they may be complements.

381
00:45:15.060 --> 00:45:17.660
So you have the two relationships intertwined.

382
00:45:17.660 --> 00:45:21.660
And so if, let's say, the price of hamburgers shoot up a lot,

383
00:45:21.660 --> 00:45:38.660
I'm sorry, I'm trying to think of an example where you would have people using less of the complement.

384
00:45:38.660 --> 00:45:44.660
Well, let's just leave it at, because I can't think of a good example right now,

385
00:45:44.660 --> 00:45:52.660
Right now, let's just leave it at that. You would have both substitution effects and complementary effects occurring for certain goods, okay?

386
00:45:52.660 --> 00:45:59.660
And as I said before, the substitution relationship is much more pervasive than the relation among complements.

387
00:45:59.660 --> 00:46:06.660
Okay. I want to put up a diagram and then talk about one other type of good.

388
00:46:06.660 --> 00:46:11.660
The diagram that Rothbard has in his book, Man Economy and State,

389
00:46:11.660 --> 00:46:14.660
That really sums up what we've been saying about substitutes and complements.

390
00:46:14.660 --> 00:46:43.660
Okay, here's what the diagram will tell us, okay?

391
00:46:43.660 --> 00:47:13.660
If we begin with good A, okay, that's the good that we're focusing on, okay, and the good is, if A and the good is substitutable for each other, okay, and we're assuming that there's a change in the stock of A, meaning that there's either more A or less A, so therefore the price of A will change, okay, if the demand is, for A is elastic, okay, and let's assume for a moment that it's elastic, then what's going to happen

392
00:47:13.660 --> 00:47:18.660
is that the demand for the other goods, the changes in prices of other goods,

393
00:47:18.660 --> 00:47:31.660
or actually they're assuming, let's see, a change in price of B, C and D.

394
00:47:31.660 --> 00:47:33.660
So A is a good that's going to be substituted.

395
00:47:33.660 --> 00:47:42.660
So if there's a change in the price of a good, and if the change, I'm sorry, if there's a change in stock of A, so there's more A or less A,

396
00:47:42.660 --> 00:47:46.220
What's going to happen to the prices right of the other goods?

397
00:47:46.220 --> 00:47:53.300
So, if the demand for A is elastic and you have an increase in the stock of A, that means the price of A falls,

398
00:47:53.300 --> 00:47:59.180
and the demand for other goods will go up, so they'll move in the same direction.

399
00:47:59.180 --> 00:48:07.020
On the other hand, if there's a fall in the stock of A, or if the demand for A is inelastic,

400
00:48:07.020 --> 00:48:11.820
as a result of a change in its stock, the prices and demands of other goods are going to move in the opposite direction.

401
00:48:11.820 --> 00:48:22.820
In other words, so if the price of A falls and less money is spent on A, then what's going to happen is that there's going to be more money to be spent on other goods, so their demands are going to go up.

402
00:48:22.820 --> 00:48:35.320
If the demand for A is unitary, meaning if the same amount of money is spent on A whether the price rises or falls, then there'll be no effect on the change or on prices of other goods.

403
00:48:35.320 --> 00:48:43.920
If there's a change in the stock of A, let's say there are now more hamburgers and therefore the price of hamburgers falls,

404
00:48:43.920 --> 00:48:53.620
that means that the demand for other goods like cheese, ketchup and so on, hamburger buns, that the demand for other goods will rise.

405
00:48:53.620 --> 00:49:01.320
We're moving the opposite direction from the price of A. So if the price of A falls, then the demand for other goods will rise.

406
00:49:01.320 --> 00:49:29.640
Then, we talk in the case of, if there's a change in the demand for A itself, let's say people just increase their demand for A, there's no change in the stock, so you have an increase in the demand for let's say Merlot, or let's say Pinot Noir, there's an increase in demand for Pinot Noir, then there has to be a decrease in demand for substitutes for Pinot Noir, such as Merlot and other red wines, and that's why it's negative, it moves in the opposite direction.

407
00:49:29.640 --> 00:49:37.640
Finally, if two goods are complementary, okay, so let's say the demand to play tennis goes up, the demand for tennis rackets go up,

408
00:49:37.640 --> 00:49:43.640
then you're going to get the demand for tennis balls going up, okay, so they're going to be, they're going to move in the same direction, all right.

409
00:49:43.640 --> 00:49:47.640
So that's sort of a summary of what we were talking about.

410
00:49:47.640 --> 00:49:57.640
Okay, the last point I want to make in this part of the lecture has to do with goods that you often see called inferior and normal goods, okay.

411
00:49:57.640 --> 00:50:02.640
And inferior normal goods are discussed in relation to changes in people's incomes.

412
00:50:02.640 --> 00:50:07.640
So, for example, if people's money income falls, let's say during a recession.

413
00:50:07.640 --> 00:50:12.640
Some people are laid off, other people don't get bonuses, other people take wage cuts.

414
00:50:12.640 --> 00:50:24.640
For all those reasons their money income falls, they may substitute lower price goods that serve sort of the same end.

415
00:50:24.640 --> 00:50:54.640
and not exactly as well but serve the same end as certain higher-priced goods and what I mean by that is things like when people tend to be less well-off, when their money incomes have fallen, they'll substitute low-cost or low-price sources of protein for the higher-cost sources of protein, hot dogs, beans, pasta, oatmeal, okay, as the economy goes through the recession, demand for those types of things rise. So they're known as inferior goods because at lower incomes,

416
00:50:54.640 --> 00:51:01.640
People demand more of those. And they're substituted for things like beef and expensive cuts of veal and so on.

417
00:51:01.640 --> 00:51:08.640
Also, during a recession, you see the demand for used cars going up, but the demand for new cars falling.

418
00:51:08.640 --> 00:51:14.640
A used car then, again, moves, the demand for the used car moves in the opposite direction of people's income,

419
00:51:14.640 --> 00:51:22.640
and therefore it's known as an inferior good. It doesn't mean that it's inferior in any absolute sense or any moral sense or anything like that.

420
00:51:22.640 --> 00:51:29.840
simply means that people tend to rank it higher on their value scale when their incomes are lower, okay?

421
00:51:29.840 --> 00:51:37.640
Other people go out to McDonald's more and they go to steak restaurants less when there's a recession, okay?

422
00:51:37.640 --> 00:51:45.040
And the reverse happens. When you come out of recession, you find out that the price for potatoes and beans, pasta or the demand for those things falls

423
00:51:45.040 --> 00:51:50.240
and the demand for steak and other more expensive foods rise, okay?

424
00:51:50.240 --> 00:51:58.540
And there's two interesting examples of this that I want to just read to you.

425
00:51:58.540 --> 00:52:04.240
One has to do with the recession in 1990-1991 that the U.S. had gone, had went through.

426
00:52:04.240 --> 00:52:07.740
It's a short little piece in the Wall Street Journal.

427
00:52:07.740 --> 00:52:10.240
It was called the Hot Dog Index.

428
00:52:10.240 --> 00:52:12.140
And it says the following.

429
00:52:12.140 --> 00:52:19.740
During a recession, hot dog sales rise, says Hebrew National, noting strong gains in 1974 and 1982.

430
00:52:19.740 --> 00:52:30.740
1974 was right in the middle of a deep stagflation, 73-75 stagflation and 1982 was near the end of a deep recession that we had from 80 to 82.

431
00:52:30.740 --> 00:52:40.740
In the first quarter of this year, now they're talking about 1991, which is a recession year, hot dog sales rose 17% and the rate has picked up heading into the prime dog days of summer.

432
00:52:40.740 --> 00:52:43.740
Well, that's their little idea of a joke there, okay?

433
00:52:43.740 --> 00:53:00.040
They also, there's another article that came out during the last recession, 2001, and it turns out that women tend, the demand for lipstick shoots up during recessions, okay?

434
00:53:00.040 --> 00:53:11.040
And it says, the reason is that women traditionally turn to lipstick when they cut back on life's other luxuries, so in that sense it's an inferior good, okay?

435
00:53:11.040 --> 00:53:14.600
My income has fallen, I've never resorted to lipstick, but anyway.

436
00:53:14.600 --> 00:53:25.960
They see lipstick, which sells for as little as a $1.99 at a supermarket to $20 plus at a department store, as a reasonable indulgence, and to pick me up when they feel they can't afford a whole new outfit.

437
00:53:25.960 --> 00:53:34.200
When lipstick sales go up, people don't want to buy dresses, says Leonard Lauder, chairman of Estee Lauder Company.

438
00:53:34.200 --> 00:53:50.600
They have a leading lipstick index. Lauder's leading lipstick index tracks lipstick sales across Estee Lauder's many brands, which accounts for sales of about half of all the present prestige cosmetics in the U.S.

439
00:53:50.600 --> 00:54:01.000
Since the September 11 terrorist attacks, the index is up broadly, says Mr. Lauder, because people were worried about their incomes even before the recession hit, or before they knew that they were in the recession.

440
00:54:01.000 --> 00:54:31.000
and also lip gloss has grown in the past three weeks, sales of MAC lipstick and lip gloss has grown 12 percent, okay, that was in early, that was actually in November of 2001, okay, what else did they say about, they say lipstick sales at mass retailers tracked by information resources, a market research firm rose 11 percent from August to October compared with a year ago, okay, so lipstick is another type of good that someone might call an inferior good

441
00:54:31.000 --> 00:54:44.000
Because when people's incomes go down, the demand for lipstick rises.

442
00:54:44.000 --> 00:54:51.000
That really ends the lecture on supply and demand.

443
00:54:51.000 --> 00:55:00.000
And what I want to do now is turn to some examples of price controls, case studies and price controls which depend on supply and demand.

444
00:55:00.000 --> 00:55:06.000
Okay, at least the analysis of price controls uses supply and demand.

445
00:55:14.000 --> 00:55:23.000
So let me first start with sort of a generic explanation of what a price control is, a maximum price control,

446
00:55:23.000 --> 00:55:27.000
and then we'll get into some actual case studies.

447
00:55:27.000 --> 00:55:32.000
So let's start with what we call a price ceiling.

448
00:55:32.000 --> 00:55:35.000
Let me zoom out.

449
00:55:44.000 --> 00:55:53.000
When we talk about a price ceiling or a maximum price control, what we mean is a legal maximum on the price at which a good can be exchanged.

450
00:55:53.000 --> 00:56:03.000
Regardless of whether or not the buyer is willing to pay the higher price, it is still illegal, and it is the seller that is prosecuted,

451
00:56:03.000 --> 00:56:11.000
even though the buyer is just as involved, just as much a voluntary partner of this illegal exchange.

452
00:56:11.000 --> 00:56:18.000
So what's the first result? Well, the first result you can see readily here. This is the old milk diagram that I used a few days ago.

453
00:56:18.000 --> 00:56:24.000
Let's assume that Congress passes the price control on milk with the best of intentions.

454
00:56:24.000 --> 00:56:28.000
That is, they want to make milk affordable to people of low income.

455
00:56:28.000 --> 00:56:38.000
The equilibrium price is $5, and that $5 is 13 million gallons of milk sold per unit of time, let's say per week.

456
00:56:38.000 --> 00:56:47.000
Now, if Congress set a price ceiling at $6, that is, above the equilibrium price, in economics we would say that's non-binding.

457
00:56:47.000 --> 00:56:52.000
It doesn't stop any exchange because the price is $5.

458
00:56:52.000 --> 00:56:55.000
At $5, supply equals demand.

459
00:56:55.000 --> 00:56:58.000
Everybody who wants a gallon of milk can find a gallon of milk

460
00:56:58.000 --> 00:57:01.000
and every seller that wishes to sell a gallon of milk can find a willing buyer.

461
00:57:01.000 --> 00:57:05.000
So there's no reason for the price to rise above that,

462
00:57:05.000 --> 00:57:10.000
at least with the value scales that produce this demand curve and with the given supply.

463
00:57:10.000 --> 00:57:16.000
However, if Congress imposes the price control below the equilibrium prices it has here,

464
00:57:16.000 --> 00:57:23.000
I've shown here at $2, let's say, then it is binding, then it does prevent a number of voluntary exchanges.

465
00:57:23.000 --> 00:57:28.000
In fact, what happens here is that the quantity demanded increases at $2, it's much higher than it is at $5.

466
00:57:28.000 --> 00:57:34.000
So instead of 13 million gallons per week, people demand 25 million gallons of milk per week.

467
00:57:34.000 --> 00:57:45.000
On the other hand, we're just focusing on this vertical supply curve, there's still 13 million gallons of milk on the market, coming to market every week.

468
00:57:45.000 --> 00:57:48.000
in the market every week, at least in the short run.

469
00:57:48.000 --> 00:57:52.000
So we have an initial shortage of 12 million gallons.

470
00:57:52.000 --> 00:57:55.000
That is, people would love to get their hands on 25 million gallons,

471
00:57:55.000 --> 00:57:58.000
yet there's only 13 million available.

472
00:57:58.000 --> 00:58:01.000
So what are some of the effects besides the shortage?

473
00:58:01.000 --> 00:58:04.000
One of the first effects is there's non-price rationing.

474
00:58:04.000 --> 00:58:10.000
Sellers know that they can sell everything they have at the price control price.

475
00:58:10.000 --> 00:58:14.000
So they begin to indulge their personal preferences and prejudices.

476
00:58:14.000 --> 00:58:16.000
If you're just against the law, they'll find ways of doing it.

477
00:58:16.000 --> 00:58:22.000
For example, during World War II, when there were price controls on many household items like beef and milk and so on,

478
00:58:22.000 --> 00:58:30.000
the local butcher or the local grocer would keep some of that in the back or under the counter

479
00:58:30.000 --> 00:58:34.000
and only sell it to his family members or his best customers, okay,

480
00:58:34.000 --> 00:58:39.000
and turn away strangers that were cruising through the neighborhood trying to find beef and milk, okay.

481
00:58:39.000 --> 00:58:46.500
Also, these controls cause people to indulge in racial, ethnic or religious discrimination.

482
00:58:46.500 --> 00:58:57.500
They know if they turn away people of different color, they're not going to have any unsold stock because there's so many people out there lining up waiting for this good, okay?

483
00:58:57.500 --> 00:59:01.500
The government then steps in and introduces political rationing schemes.

484
00:59:01.500 --> 00:59:07.500
For example, when we had price controls on gasoline, we had shortage of gasoline in 1979.

485
00:59:07.500 --> 00:59:13.500
They imposed the odd even day rationing scheme, which meant that if you had an odd number,

486
00:59:13.500 --> 00:59:17.500
if your license plate ended in an odd number, you could only come on certain dates,

487
00:59:17.500 --> 00:59:20.500
let's say Monday, Wednesday, and Saturday to get gasoline.

488
00:59:20.500 --> 00:59:24.500
And if it was on an even number, then you'd come on the other days.

489
00:59:24.500 --> 00:59:32.500
You can produce a shortage of almost any item, as the Soviet Union has shown us.

490
00:59:32.500 --> 00:59:39.500
If you saw the movie Moscow and the Hudson with Robin Williams, what were people lined up for at the beginning of that movie?

491
00:59:39.500 --> 00:59:43.500
Well, it was just a common item. It was toilet paper.

492
00:59:43.500 --> 00:59:51.500
To hide the fact that they were producing very few consumer goods, they kept the price of consumer goods very low, which created shortages.

493
00:59:51.500 --> 01:00:12.500
And even everyday items like toilet paper, smaller women's sizes, they made very large clothing to fulfill their quotas of the yards of clothing that they had to produce, children's shoes, they made big shoes because they were trying to meet some gross output target, there were just shortages of everything.

494
01:00:12.500 --> 01:00:20.500
In fact, the old joke that was going around, that was current at that time, was, you know, a Russian, a Westerner sees a Russian getting on a long line and says,

495
01:00:20.500 --> 01:00:26.500
how do you know what's at the end of that line? The line's winding around the block. He says, I don't know, but there's so many people on it, it must be good.

496
01:00:26.500 --> 01:00:32.500
Okay, so that was, you know, that was the whole mentality that, you know, you just got on lines and waited.

497
01:00:32.500 --> 01:00:37.500
Then black markets crop up, okay? You can create a black market in anything, okay?

498
01:00:37.500 --> 01:00:51.500
If you really did have firm price controls on milk, you would find that somehow organized crime got involved in transporting milk and selling it at higher prices, that is, near market prices, okay.

499
01:00:51.500 --> 01:01:00.500
You'd see some, or let's say you put price controls on candy bars, okay, you kept them very low.

500
01:01:00.500 --> 01:01:03.100
You'd see organized crime getting involved in candy bars.

501
01:01:03.100 --> 01:01:05.100
You'd have guys in alleys near schools saying,

502
01:01:05.100 --> 01:01:09.100
take kids, you want to buy a hot candy bar, rather than drugs.

503
01:01:09.100 --> 01:01:14.100
So organized crime will get involved in selling these things.

504
01:01:14.100 --> 01:01:15.900
You get a spillover demand.

505
01:01:15.900 --> 01:01:25.100
People who are frustrated in trying to find milk begin to turn to what they believe are partial substitutes, soy milk, fruit juice, soda.

506
01:01:25.100 --> 01:01:29.100
The demand for these things will go up and prices in these markets will begin to rise

507
01:01:29.100 --> 01:01:33.500
and then there will be pressure to put price controls on these goods, okay?

508
01:01:33.500 --> 01:01:40.500
Then you get over time, because it's unprofitable or not as profitable to produce at $2,

509
01:01:40.500 --> 01:01:47.500
you'll find over time the less efficient dairy farmers going out of business along this long run supply curve

510
01:01:47.500 --> 01:01:50.200
and the more efficient ones cutting back.

511
01:01:50.200 --> 01:01:54.700
So the marginal producers go out of business and the ones that are making higher profits,

512
01:01:54.700 --> 01:01:57.300
they remain in business but they produce much less.

513
01:01:57.300 --> 01:02:01.400
So now, over time, the shortage gets even worse.

514
01:02:01.400 --> 01:02:04.300
So now, instead of 12 million gallons of shortage per week,

515
01:02:04.300 --> 01:02:08.300
now you only have 5 million gallons being supplied and 25 million demanded.

516
01:02:08.300 --> 01:02:13.100
You have a huge, massive shortage, okay?

517
01:02:13.100 --> 01:02:16.200
You get to the point, then, where Congress, the shortage gets so bad,

518
01:02:16.200 --> 01:02:21.400
that Congress either repeals the price ceiling on milk, okay, or imposes further controls.

519
01:02:21.400 --> 01:02:26.900
In other words, they say, well, if it's not profitable to sell milk at $2,

520
01:02:26.900 --> 01:02:37.500
That simply means that the price of inputs are too high, so then they put price controls on cattle feed, dairy cows, milking machines, and you create shortage of those things.

521
01:02:37.500 --> 01:02:44.980
And then there's an incentive to go even further and put controls on the inputs into those products,

522
01:02:44.980 --> 01:02:55.420
until the entire economy is brought under price controls and you have universal shortages, and you're back at the Soviet-style economy.

523
01:02:55.420 --> 01:03:02.220
Now let's talk about rent control. Let me give you a real, let's talk about some real examples.

524
01:03:02.220 --> 01:03:07.220
A rent control is a maximum rent that can be charged by law.

525
01:03:07.220 --> 01:03:14.520
New York City is the best example of rent control. They've had rent control since 1946, all during peacetime.

526
01:03:14.520 --> 01:03:23.520
Most cities repealed their rent controls after World War II, but not New York City.

527
01:03:23.520 --> 01:03:26.520
So, let me give you a simple example of what a rent control might look like.

528
01:03:40.520 --> 01:03:46.520
Okay, let's take a small city where there's a certain amount of apartments available.

529
01:03:46.520 --> 01:03:50.520
Okay, so there's a given stock, it's fixed at any moment in time, it's 700.

530
01:03:50.520 --> 01:04:04.520
and there is a certain rent, $900 is the equilibrium rent, and at that rent there are 700 apartments and 700 households and single people that want to rent those apartments.

531
01:04:04.520 --> 01:04:08.520
Everyone who wants an apartment can find an apartment at $900, okay?

532
01:04:08.520 --> 01:04:17.520
Now the city council steps in and says, you know what, many families can't afford these high rents, so let's impose a control at $600.

533
01:04:17.520 --> 01:04:23.520
Suddenly, there are more people that want to move from the suburbs into that city to be closer to their jobs.

534
01:04:23.520 --> 01:04:37.520
There are also students that may have been crammed together for an apartment that now, at $600, will want to go out and get two-bedroom apartments with two people in it instead of having four people in a two-bedroom apartment.

535
01:04:37.520 --> 01:05:05.520
Department. So you get a lot of an increase in quantity demanded. So now there's a thousand department units demanded and there's still at least initially the 700 available, okay. So you get a 300 unit shortage, okay. There are many people out there that would like to live in the city that are willing to pay $600 that cannot find an apartment, okay. And of course this is magnified tremendously in a large city like New York City, okay.

536
01:05:05.520 --> 01:05:10.520
So, one of the first things that happens is when you discuss rent controls, you say,

537
01:05:10.520 --> 01:05:16.520
well, you know, we should take the rent controls off and the shortage in Manhattan and other parts of New York City will disappear.

538
01:05:16.520 --> 01:05:19.520
People say, well, what do you want? People living out in the streets?

539
01:05:19.520 --> 01:05:28.520
Well, what happens is that when you have rent controls that are very, very much below the market price, people use space uneconomically.

540
01:05:28.520 --> 01:05:35.520
So, if you would allow prices to rise, it wouldn't necessarily be the case that people were thrown out into the streets.

541
01:05:35.520 --> 01:05:43.520
What you would have is, on the one hand, you might have like two students living in a two-bedroom apartment.

542
01:05:43.520 --> 01:05:51.520
They would take two roommates in at the higher rent. So, each per person space would be conserved.

543
01:05:51.520 --> 01:05:57.520
Also, let's say you have a widow that's living alone in an apartment. She's been there for a while.

544
01:05:57.520 --> 01:06:02.520
She's on a fixed income. Well, her alternative is not to get thrown out of that apartment.

545
01:06:02.520 --> 01:06:07.520
She can easily take in other single women to share the apartment with her.

546
01:06:07.520 --> 01:06:16.520
So people make these types of arrangements. In fact, back in the 70s and 80s, when certain prices were allowed to rise,

547
01:06:16.520 --> 01:06:21.520
there were these very small luxury apartments being built, and they could charge market rent.

548
01:06:21.520 --> 01:06:33.520
The rent controls were loosened or taken off of new luxury apartments and the prices were well over $1,000.

549
01:06:33.520 --> 01:06:39.520
What happens was that you've got a lot of people living together in what was called mingles living.

550
01:06:39.520 --> 01:06:46.520
They weren't in any sort of romantic relationship, but men and women were living two and three to a very small apartment.

551
01:06:46.520 --> 01:06:55.520
One-bedroom apartment, simply to conserve on the cost.

552
01:06:55.520 --> 01:07:01.520
All right. Now, what are some of the... Actually, let me mention...

553
01:07:01.520 --> 01:07:08.520
Well, actually, I'll do that in a moment. There's an interesting article about France. I just want to bring to your attention about the price controls or rent controls in France.

554
01:07:08.520 --> 01:07:14.520
But let's look at the other effects before we get to that.

555
01:07:14.520 --> 01:07:44.520
One of the effects is, of course, is the spillover of demand, okay, what happens is that people move out to Nassau County, which is a county in New York City, right next to New York City, it's in Long Island, or they move to Northern New Jersey, and that causes an increase in demand for apartments in those areas, and that causes rents to rise, so you have the spillover demand, rise in rents in other areas, okay, also landlords are no different than any other seller, they want to maximize their profit.

556
01:07:44.520 --> 01:07:53.320
to raise the rent, and costs continue to rise, what they're going to do, and their taxes will continue to rise, utilities continue to rise,

557
01:07:53.320 --> 01:07:57.960
what they're going to do is to cut back on the maintenance of the apartment building, okay?

558
01:07:57.960 --> 01:08:05.320
It doesn't mean they're evil people, it simply means that they're trying to reestablish their profit margin like anyone else would do.

559
01:08:05.320 --> 01:08:13.220
So they cut costs. It's not illegal to cut costs, so they cut costs. Now this does not affect upper and middle income living that much.

560
01:08:13.220 --> 01:08:43.220
In other words, what happens is they might fire the doorman to cut costs in these upscale buildings, or they may not paint the common areas, you know, every year as they had before, or they may not answer a problem that you have with your plumbing, okay, or your heating, the next day, they may cut back on their maintenance crew when they may get around to it, you know, at the end of the week, okay. So that doesn't make the apartment building unlivable. However, what about low-income apartments?

561
01:08:43.220 --> 01:08:53.220
The Federal's apartments to begin with. So when the hot water heater breaks down in the middle of the winter, they don't repair it, so people live without hot water.

562
01:08:53.220 --> 01:09:02.220
If light bulbs go out in common areas, they don't replace the light bulbs. So people come in the dark, it becomes a haven for muggers and junkies and so on.

563
01:09:02.220 --> 01:09:12.220
The elevator breaks or becomes dangerous because the doors don't open or close right, and you find children falling down shafts and getting killed.

564
01:09:12.220 --> 01:09:31.220
Well, because the building isn't being maintained. People are cutting back on their maintenance, to the point where, eventually, even at this low level of maintenance, it still doesn't pay, the rents have become lower than the cost, the out-of-pocket cost such as utilities and taxes and so on.

565
01:09:31.220 --> 01:09:37.220
And there's a very interesting and moving article by a former landlord.

566
01:09:37.220 --> 01:09:43.220
It was written in the 1970s. He was a Hungarian immigrant.

567
01:09:43.220 --> 01:09:46.220
And it's entitled, I Was a Slumlord.

568
01:09:46.220 --> 01:09:49.220
He says, I was a slumlord. Here's how I came to be one.

569
01:09:49.220 --> 01:09:54.220
I was born 69 years ago. I learned the craft of cabinet making my native land Hungary.

570
01:09:54.220 --> 01:09:57.220
This would have been my 50th year of working in wood creating beauty.

571
01:09:57.220 --> 01:10:00.220
And he says, my name is well known and well respected in the trade.

572
01:10:00.220 --> 01:10:08.220
About 20 years ago I bought a small factory building in East Harlem at 508 East 117th Street and he worked together there with 10 to 12 men.

573
01:10:08.220 --> 01:10:14.220
With changes, improvements and additional construction the factory cost me about $65,000.

574
01:10:14.220 --> 01:10:21.220
Then he says a few years later he bought another building which was adjoining and he got it at a bargain price.

575
01:10:21.220 --> 01:10:25.220
He says with the idea of expanding my workshop into it or using the lot for parking I bought it.

576
01:10:25.220 --> 01:10:38.220
I bought it. So for $12,500 in cash, he became the owner of a four family house. The four families living in the house are all decent working people. They've never been on welfare. They don't need charity.

577
01:10:38.220 --> 01:10:51.220
But he points out, because of rent controls, he says, for several years now, my cash expenses have exceeded my income by about 25%, okay? And this is not even counting the amortization, not even counting the mortgage payments to the bank.

578
01:10:51.220 --> 01:10:56.220
So he's not even covering his out-of-pocket expenses like utilities and taxes.

579
01:10:56.220 --> 01:10:59.220
He says, the building was in poor repair when I bought it.

580
01:10:59.220 --> 01:11:02.220
By now it is the favorite hunting ground of every city inspector.

581
01:11:02.220 --> 01:11:08.220
The building needs a new roof, new walls, new ceilings, new plumbing, new wiring, new doors and a new heating system.

582
01:11:08.220 --> 01:11:10.220
It needs about $15,000 worth of repairs.

583
01:11:10.220 --> 01:11:17.220
Now remember, he's not even making enough to cover his operating costs, let alone put any money back into the building.

584
01:11:17.220 --> 01:11:26.220
The building now has a gross income of $2,600 a year, of which I am paying for taxes in heat $3,000, okay.

585
01:11:26.220 --> 01:11:32.220
So does he have any incentive whatsoever to put any money back into renovating? Of course not.

586
01:11:32.220 --> 01:11:38.220
So far I've been fined four times for failure to comply with orders to correct building code violation.

587
01:11:38.220 --> 01:11:42.220
I was summoned to court a few weeks ago. I explained my predicament to the judge.

588
01:11:42.220 --> 01:11:48.220
The judge, he assured me of his sympathy, fined me $40, and promised me that my next fine would be higher.

589
01:11:48.220 --> 01:11:58.220
So he says, I did not go home from the court. This is interesting. I went straight to the offices of the Roman Catholic Church, local Roman Catholic Church, and they asked them to accept the building as a free gift. They refused.

590
01:11:58.220 --> 01:12:02.220
An hour later, I made the same offer to the Protestants. Again, the answer was no.

591
01:12:02.220 --> 01:12:11.220
Next, I offered the building free, without any money, to the four tenants. They didn't want it, because then they'd have to pay the extra money for the utilities and so on.

592
01:12:11.220 --> 01:12:20.220
So he says, okay, I'll abandon the building, that's my next thought, I will stop collecting rents, will not pay taxes or heat, you'd be better off, be making $400 or more.

593
01:12:23.220 --> 01:12:28.220
This sounds like an easy way out, but my lawyer tells me it cannot be done without my being legally financially responsible.

594
01:12:28.220 --> 01:12:33.220
So here I am with a building assessed by, the city assesses the building at $21,000.

595
01:12:33.220 --> 01:12:37.220
Now, if you can't even give it away, it's garbage, right, so it has less than zero price, you can't get rid of it.

596
01:12:37.220 --> 01:12:47.220
So they assess it at $21,000 for tax purposes, back in the early 70s, that I cannot give away, I cannot sell, and I cannot abandon. I am forced by the Lord to operate it.

597
01:12:47.220 --> 01:12:55.220
He says, that is, I was, I am not any longer. I have sold the building for $30,000. So this will show you that it is garbage.

598
01:12:55.220 --> 01:13:02.220
As an extra inducement, I threw into the bargain my old factory building, which cost me close to $70,000 for nothing.

599
01:13:02.220 --> 01:13:17.220
In other words, I sold real estate that cost me $80,000 15 years ago, when the price level was much lower, for $30,000 to be paid without interest in 6 years, so in present value terms, it's even much less than $30,000.

600
01:13:17.220 --> 01:13:23.220
and the price level is much lower, for $30,000 to be paid without interest in six years.

601
01:13:23.220 --> 01:13:27.220
So in present value terms, it's even much less than $30,000.

602
01:13:27.220 --> 01:13:33.220
With the $50,000 that I lost on the deal and which is a major part of my savings, my life savings, I bought freedom.

603
01:13:33.220 --> 01:13:37.220
At 69 years old, I am too old to start a revolution or to fight city hall.

604
01:13:37.220 --> 01:13:43.220
This is, I will barely miss my shop or I spent 49 happy years, but I am no longer a slumlord.

605
01:13:43.220 --> 01:13:59.220
So, as we'll see later on, contrary to the common conception, landlords are not all wealthy, owning many, many buildings, that's not the case.

606
01:13:59.220 --> 01:14:08.220
In many cases in New York, they own one or two buildings and many times their tenants have much better paying jobs than what they earn on their buildings.

607
01:14:08.220 --> 01:14:21.020
Okay, so what happens is that you begin then to abandon these buildings, alright, and not maintain them.

608
01:14:21.020 --> 01:14:25.820
So you get a degeneration into slums and then into abandoned buildings.

609
01:14:25.820 --> 01:14:34.220
And what I want to do last before we stop for today and I'll continue this tomorrow is to show you some pictures.

610
01:14:34.220 --> 01:14:40.620
The economists have often said, by the way, that the most efficient way to destroy a city, besides bombing, is to impose rent controls.

611
01:14:40.620 --> 01:14:49.220
Okay, so, to show you some pictures of bomb damage in World War II, and have you ever seen these pictures?

612
01:14:49.220 --> 01:14:55.220
Yeah, I think it's a good indication of what rent controls can do.

613
01:14:55.220 --> 01:15:19.220
So, this is, is it over? Let me focus. Okay. Okay, is that bomb damage or is that rent control? Okay, well, in that particular case, it happens to be bomb damage in Germany, in World War II.

614
01:15:19.220 --> 01:15:21.220
Okay, let's look at another.

615
01:15:26.220 --> 01:15:28.220
Is that bomb damage or rent control?

616
01:15:31.220 --> 01:15:33.220
That's rent control, that's the Bronx.

617
01:15:41.220 --> 01:15:43.220
Bomb damage or rent control?

618
01:15:45.220 --> 01:15:48.220
That is, that's bomb damage, that's Hiroshima.

619
01:15:49.220 --> 01:16:04.580
The bomb damage of rent control, let's see what that is, I'm not sure. That's Nagasaki.

620
01:16:04.580 --> 01:16:24.060
once again this is this is you know this is bond damage about that that's rent

621
01:16:24.060 --> 01:16:30.060
Rent Control. That's Rent Control. That's Rent Control and that's the Bronx.

622
01:16:30.060 --> 01:16:34.060
Why is that here?

623
01:16:34.060 --> 01:16:40.060
No, those were nuclear, I mean the nuclear destruction.

624
01:16:40.060 --> 01:16:43.060
Patrick, come up here so I can slap you. Okay.

625
01:16:43.060 --> 01:16:45.060
Bomb damage or rent control?

626
01:16:45.060 --> 01:16:49.060
Yeah, I think you're right. I think that's rent control. That's rent control.

627
01:16:49.060 --> 01:16:53.520
Flying Beast, right?

628
01:16:55.520 --> 01:16:57.300
Bomb damage to rent control.

629
01:16:57.300 --> 01:16:58.900
That looks like bomb damage to me.

630
01:16:58.900 --> 01:17:00.340
Let's see if it is.

631
01:17:00.340 --> 01:17:03.100
That is Nagasaki.

632
01:17:03.100 --> 01:17:04.640
But let's see.

633
01:17:04.640 --> 01:17:07.180
I've got two more.

634
01:17:07.180 --> 01:17:08.380
That's definitely rent control.

635
01:17:08.380 --> 01:17:09.580
Yeah, that's definitely rent control.

636
01:17:09.580 --> 01:17:11.140
That's South Bronx.

637
01:17:11.140 --> 01:17:16.240
Now many of those buildings that you see standing,

638
01:17:16.240 --> 01:17:17.360
not all of them, but many of them,

639
01:17:17.360 --> 01:17:22.660
are structurally sound, and they can be renovated.

640
01:17:22.660 --> 01:17:24.560
If there were no rent controls, they'd be renovated.

641
01:17:24.560 --> 01:17:30.260
Now, this is back in the 70s and 80s when all this was occurring.

642
01:17:30.260 --> 01:17:40.260
And finally, what about that?

643
01:17:40.260 --> 01:17:43.860
Yeah, that's rent control.

644
01:17:43.860 --> 01:18:04.860
So, if they were permitted to, if rent controls were abolished, many of those buildings, and we have a lot of homeless people in New York City, many of those buildings would be fit for people to live in, because they would be renovated by entrepreneurs who would then rent them out at the market rents.

645
01:18:04.860 --> 01:18:18.860
One last point I want to make, and I'll say more about right control tomorrow, but landlords aren't any more evil or greedy than anyone else.

646
01:18:18.860 --> 01:18:32.860
If, for example, people had a, let's say for some reason, to compete with foreign products, we put price controls or wage controls on accountants.

647
01:18:32.860 --> 01:18:37.860
What would people in the accounting profession do here in the United States?

648
01:18:37.860 --> 01:18:43.860
They go into other professions that were not controlled.

649
01:18:43.860 --> 01:18:45.860
Well, the same thing is true in New York City.

650
01:18:45.860 --> 01:18:54.860
Since the 1980s, we've had this massive conversion called condomania into co-ops and condos.

651
01:18:54.860 --> 01:18:59.860
In other words, what they did, since there's no controls on the price that you can sell these apartments at,

652
01:18:59.860 --> 01:19:11.860
So as there are controls on the rents, what they did was actually begin to sell many rental units on the market at prices that were very, very high.

653
01:19:11.860 --> 01:19:16.860
So in other words, they transformed them into or converted them is the word.

654
01:19:16.860 --> 01:19:22.860
They converted them into co-ops and into condos.

655
01:19:22.860 --> 01:19:28.860
So that what you got then, as a result of the abandonment, I wanted to show the Long One Supply Curve.

656
01:19:28.860 --> 01:19:32.660
Here's where the Long One Supply Curve is relevant.

657
01:19:32.660 --> 01:19:43.960
You begin to get a disappearance of, what's not here, a disappearance of the, yeah.

658
01:19:43.960 --> 01:19:49.660
A movement down along this Long One Supply Curve.

659
01:19:49.660 --> 01:19:59.660
So as buildings are converted or abandoned, okay, or just fall apart, you move from C to A, so now the building shortage gets worse.

660
01:19:59.660 --> 01:20:12.660
Not only aren't they building new buildings, but now you get a bigger and bigger shortage, so in the long run, the shortage increases.

661
01:20:12.660 --> 01:20:21.660
One last, actually, maybe we'll just take the next few minutes, unless people have questions, and then just finish the rent control section.

662
01:20:21.660 --> 01:20:24.660
We want to ask the question, who benefits?

663
01:20:24.660 --> 01:20:29.660
We always want to ask the question, cui bono, when we talk about government programs.

664
01:20:29.660 --> 01:20:33.660
Who benefits? Who gets the benefit? Who is victimized?

665
01:20:33.660 --> 01:20:40.660
The traditional view, or the conventional view, is that, well, tenants, well, they're poor, they're noble, they're the majority.

666
01:20:40.660 --> 01:20:43.700
they benefit from rent control

667
01:20:43.700 --> 01:20:49.460
and landlords, it's a small group of greedy, greedy people, they're the ones that are victimized by rent control

668
01:20:49.460 --> 01:20:53.480
but that's not actually the correct

669
01:20:53.480 --> 01:20:56.260
analysis of the situation

670
01:20:56.260 --> 01:20:58.740
in fact, the tenants that are lucky enough

671
01:20:58.740 --> 01:21:00.780
to have those apartments

672
01:21:00.780 --> 01:21:02.060
that are

673
01:21:02.060 --> 01:21:04.940
in such short supply are the ones that benefit

674
01:21:04.940 --> 01:21:08.340
what about the people between

675
01:21:08.340 --> 01:21:15.340
What about those people who would like to live in the city and are willing to pay the rent controlled rent but cannot find apartments?

676
01:21:15.340 --> 01:21:25.340
Those are prospective tenants. They are victims. They're people whose jobs have moved to that city and who can't find apartments in that city.

677
01:21:25.340 --> 01:21:33.340
Or they're young couples who are ready to get married. For example, in Sweden where there were rent controls for a long time, I don't know if there still are,

678
01:21:33.340 --> 01:21:44.340
are couples postpone their marriage to, or made their marriage coincide with their place on the waiting list for new apartments, which could be two or three years long.

679
01:21:44.340 --> 01:21:47.340
If you didn't want to get married and live with the in-laws.

680
01:21:47.340 --> 01:21:55.340
So the same thing happens to young couples that want to live in the neighborhood where their parents grew up, or where they grew up rather, near their parents or whatever.

681
01:21:55.340 --> 01:22:01.340
They can't, they can't find apartments, so they wind up living with their parents or postponing their marriages.

682
01:22:01.340 --> 01:22:08.340
So prospective tenants, whether from outside the area or young people that are growing up in the area and want to stay there, they're hurt.

683
01:22:08.340 --> 01:22:13.340
Now why don't politicians take their desires into account?

684
01:22:13.340 --> 01:22:18.340
They don't because prospective tenants, most of them are outside the area and they don't vote.

685
01:22:18.340 --> 01:22:25.340
What about lower income tenants? Supposedly the group that's supposed to be the primary group that benefits.

686
01:22:25.340 --> 01:22:32.340
They're living in abandoned buildings or buildings where the city is taken over and the city is the worst landlord.

687
01:22:32.340 --> 01:22:39.340
Or they're living in these no-frills buildings which have not been maintained and which are falling apart.

688
01:22:39.340 --> 01:22:45.340
So lower income tenants are on the victim's side. Who are the beneficiaries?

689
01:22:45.340 --> 01:22:52.340
Middle and upper income tenants who have very, very nice plush apartments at much below market rents.

690
01:22:52.340 --> 01:23:13.340
rents, the politicians to whom they contribute money and who get elected by acting as friends of the poor, who don't understand the whole situation, and the huge rent controlled bureaucracy, who have nice cushy jobs in that bureaucracy.

691
01:23:13.340 --> 01:23:15.980
The property tax that was kind of fast.

692
01:23:15.980 --> 01:23:23.420
I was involved in the election in Vancouver, and the city was going up just one landmark.

693
01:23:23.420 --> 01:23:31.100
And it seemed as though they were trying to shut down all the housing for poor people,

694
01:23:31.100 --> 01:23:34.460
and then they would even fair out a demand on public housing.

695
01:23:34.460 --> 01:23:42.060
I don't know, it seemed like something like this was happening, but I'm not sure if rent control

696
01:23:42.060 --> 01:23:54.060
I don't know about property taxes. The question is, can property taxes have the same effect as rent controls do?

697
01:23:54.060 --> 01:23:58.060
Property taxes would certainly make owning buildings less profitable.

698
01:23:58.060 --> 01:24:05.060
And if you reduce the profit, you are going to have an effect on the quality of the property,

699
01:24:05.060 --> 01:24:10.060
because people will then cut costs by maintaining the building less well.

700
01:24:10.060 --> 01:24:18.060
So there can be some of that with very high property taxes, but I don't think to the same extent as with price controls.

701
01:24:18.060 --> 01:24:27.060
So the last thing I want to do is to read to you an amazing article in which they talk about who actually benefits from these rent controls.

702
01:24:27.060 --> 01:24:30.060
Rent Controls.

703
01:24:30.060 --> 01:24:35.060
This was in the Wall Street Journal.

704
01:24:35.060 --> 01:24:44.060
Let's see if I have it here.

705
01:24:44.060 --> 01:24:46.060
Yeah, here it is.

706
01:24:46.060 --> 01:24:55.060
You'd be amazed at who lives in rent controlled apartment buildings.

707
01:24:55.060 --> 01:25:01.060
Yeah, people from all walks of life have lucked into rent controlled apartments.

708
01:25:01.060 --> 01:25:11.060
Now, if for some reason your family was in the apartment with a tenant before 1946, they're paying extremely low rents, okay?

709
01:25:11.060 --> 01:25:20.060
There's something called vacancy decontrol in New York City in which when a tenant moves out, you can raise rents 10 or 15 percent, okay?

710
01:25:20.060 --> 01:25:22.060
If it's below the market rent, okay?

711
01:25:22.060 --> 01:25:28.060
But if tenants don't move out, then the only increases the landlord can get in his rents over time

712
01:25:28.060 --> 01:25:31.060
is if he can show hardship, that costs have risen a great deal

713
01:25:31.060 --> 01:25:34.060
and that he has to raise the rent to cover the costs.

714
01:25:34.060 --> 01:25:37.060
Which means that the rents stay much below market rents,

715
01:25:37.060 --> 01:25:43.060
especially for people whose families have had the apartments since before 1946.

716
01:25:43.060 --> 01:25:49.060
In any case, people from all walks of life have lucked into rent-regulated New York City apartments.

717
01:25:49.060 --> 01:26:01.060
Actresses Mia Farrow, Cicely Tyson, the Baroness Ingrid Thyssen, Sydney Biddle Barrows, the so-called Mayflower Madam, the Senate Senate, State Senate Democratic leader lives in one.

718
01:26:01.060 --> 01:26:05.060
Now let's go into some of the prices.

719
01:26:05.060 --> 01:26:10.060
Philippe de Montebello, who used to be the director of the Metropolitan Museum of Art,

720
01:26:10.060 --> 01:26:19.060
very high paying job, pays about $1,900 a month for a seven room apartment on Fifth Avenue.

721
01:26:19.060 --> 01:26:24.060
So he's paying $2,000 a month. Now, that market rate is $6,000 for that apartment.

722
01:26:24.060 --> 01:26:34.060
So he's being subsidized, a very wealthy individual is being subsidized at the rate of $4,000 per month, which is $48,000 a year.

723
01:26:34.060 --> 01:26:46.060
Jack Futterman, he's the chairman of the Pathmark stores, at least he was in the mid-90s, pays $1,300 for an apartment on Central Park South.

724
01:26:46.060 --> 01:26:51.060
That's half the free market rent, so he's getting a huge subsidy.

725
01:26:51.060 --> 01:27:01.060
And there's a few other really interesting people.

726
01:27:01.060 --> 01:27:17.060
Mia Farrow, whose family had this apartment for many years, pays about $2,900, she's the actress, used to be Woody Allen's girlfriend.

727
01:27:17.060 --> 01:27:24.060
Anyway, she pays about $2,900 a month for ten rooms on Central Park West, which is a fraction of the market value.

728
01:27:24.060 --> 01:27:36.060
The most egregious example, I think, is this entertainment lawyer, Alan Grubman, who is Lizzie Grubman's father, the famous car crasher.

729
01:27:36.060 --> 01:27:41.060
She crashed her SUV, I think, into a notorious case a few years ago.

730
01:27:41.060 --> 01:27:46.060
In any case, he represents Billy Joel, Madonna, Michael Jackson, David Geffen.

731
01:27:46.060 --> 01:27:50.060
He pays about $9,000 a month for his rent-stabilized apartment.

732
01:27:50.060 --> 01:28:20.060
Department. It seems like an astronomical sum, but he has the entire 17th floor of an old Park Avenue building that spans half the city block. It could rent on the open market for $20,000. Okay. He's paying less than half. Okay. So why do we have rent controls? Why aren't they abolished if they hurt poor tenants, if they hurt landlords, if they hurt prospective tenants, people that would like to live there? They're not abolished because the people that vote in elections

733
01:28:20.060 --> 01:28:36.060
The poor tenants and especially in local elections and who contribute to these local elections are not the poor tenants, are not people that aren't there, they can't vote, but they're middle and upper income tenants that are living in nice apartments at much below market rents, okay?

734
01:28:36.060 --> 01:29:06.060
If you really wanted, and I'm not advocating this, if you really wanted to help the poor or focus a program on allowing the poor to afford high rents, there's something called rent vouchers where you could just simply leave the price at the equilibrium rent and then if you believe that the person can only afford $600, give them a monthly rent voucher of $300. This then would target the poor and would not in any way benefit middle and upper incomes.

735
01:29:06.060 --> 01:29:14.060
And you get rid of the tendency to slums, you get rid of the massive shortage, you wouldn't have any of those problems.

736
01:29:14.060 --> 01:29:22.060
But rent vouchers don't benefit the people that vote, who are the upper and middle income tenants.

737
01:29:22.060 --> 01:29:27.060
Now, the free market policy is even better than that. A good example is Houston.

738
01:29:27.060 --> 01:29:31.060
Back in the mid-1980s, I was in Houston giving some lectures.

739
01:29:31.060 --> 01:29:36.060
And I noticed that rather than landlords and tenants hating each other, as they do in New York City,

740
01:29:36.060 --> 01:29:40.060
because obviously the landlords are always trying to get higher rents and trying to get the tenants out,

741
01:29:40.060 --> 01:29:44.060
so they can raise their rents a little bit or they're not taking care of the building.

742
01:29:44.060 --> 01:29:48.060
So there's sort of a class warfare between tenants and the landlords.

743
01:29:48.060 --> 01:29:51.060
Instead of that, I was staying in an apartment with a friend.

744
01:29:51.060 --> 01:29:54.060
He's a landlord and he says hello to his landlord.

745
01:29:54.060 --> 01:29:59.060
I mean, you don't hate the guy you buy bread from or you don't hate the person that you rent storage space from.

746
01:29:59.060 --> 01:30:00.820
Why do landlords and tenants hate each other?

747
01:30:00.820 --> 01:30:05.740
Now here, down here you might not see that, but in the North, on television all the time,

748
01:30:05.740 --> 01:30:12.140
you see tenants continually boycotting the landlords and demonstrating against them and so on.

749
01:30:12.140 --> 01:30:13.740
There's a lot of hatred there.

750
01:30:13.740 --> 01:30:16.660
But in Houston, there was a building boom.

751
01:30:16.660 --> 01:30:22.660
And when I was there, in fact, there was rent, there were apartment vacancies.

752
01:30:22.660 --> 01:30:26.620
Not only wasn't there a shortage, there was a huge surplus of apartments in the mid-80s.

753
01:30:26.620 --> 01:30:33.420
They were giving away six months free rent to get people to come, they were giving away free microwave ovens, so on and so forth.

754
01:30:33.420 --> 01:30:40.740
So if you get rid of some of the restrictive building codes and allow entrepreneurs to build lower cost housing,

755
01:30:40.740 --> 01:30:48.540
you will get more than enough housing at low rents for the low income tenants.

756
01:30:48.540 --> 01:30:54.540
In fact, when I went to college in Boston where the unions are very, very strong,

757
01:30:54.540 --> 01:31:19.540
They wanted to build new dorms on the Boston College campus, and they somehow got an exemption from the building codes, which allowed them to ship in modular housing, which meant these houses were built not by local construction unions, but in factories elsewhere in the country, and then shipped in and put together in modular pieces right on campus, okay?

758
01:31:19.540 --> 01:31:28.540
That's the type of low-cost housing that, because of unions and their influence on building codes, do not allow to be built.

759
01:31:28.540 --> 01:31:42.540
So that's really the solution, the free market solution, the solution that works to the so-called scarcity of housing for lower income people.

760
01:31:42.540 --> 01:31:47.540
Okay, I'll stop here and tomorrow we'll talk about other types of price controls.

761
01:31:49.540 --> 01:31:51.540
Thank you very much.