What I want to do is continue with the discussion of supply-demand and move on to the long run, okay?
That is, what influences the shifts of the supply curves?
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,
but there's also an effect that occurs after prices rise, okay?
If there's an increase in demand and prices rise, entrepreneurs realize that they're earning more profit.
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.
So, over time, you're going to have new firms entering the industry and old firms expanding.
And that's going to shift, step by step, the supply curve to the right.
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.
So, over time, what happened was that there was an increase in supply and the price tended to fall, okay?
And it tended to fall to a point where all profits were wiped out, again, in that industry.
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,
and by profit, by pure profit, or entrepreneurial profit, we mean any excess return above the rate, going rate of return throughout the economy.
So if the going rate of return throughout the economy on investment, which represents people's time preferences, that's five percent.
If rates of return in one industry shoot up to ten or fifteen percent, you're going to see supply expanding over time.
So let me just give you an analysis of this. I'll give you some examples.
What I want to do first is give you a graphical analysis.
Let's go down a little bit. This is Murray Rothbard's graph, so I want to just go down a little bit.
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.
And suddenly demand increases. So demand increases from D to D prime.
As demand shifts to the right, there's a temporary shortage and prices begin to be bid up.
Prices then rise all the way up to Y. So prices are now zero Y, much above zero X.
Now, that's what happens in the immediate run. There's a momentary equilibrium.
But at that price, high price of Y, producers in that industry are earning higher profits.
So what's going to happen? What's going to happen is that they're going to begin to allocate additional resources.
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?
So we might think of the shift to red wine for health reasons, okay?
Eventually, first the demand shifts up, price of red wine skyrockets, and over time more and more vineyards turn to producing red wine.
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,
But at point Z, there is what we might call a new final state of rest.
Now that's a term we haven't used, the final state of rest.
Let me just explain that term and then we'll come back to the analysis.
In a final state of rest, we assume that the economy is in a situation in which production has been completely adjusted
throughout the economy to consumers' most highly valued ends.
There can be no change in production that benefits consumers.
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%.
So we start from that point, so that's final state of rest one right there, point A.
This is just one of many goods in which everyone is earning the going rate of return which reflects time preference.
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.
So there's one change in the data, and that is people's value scales for red wine change. We allow that to change.
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.
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,
and the demands for which have fallen because people now value red wine more highly
and the shift of those resources into the red wine industry.
That takes a number of years. We don't allow anything else to change during that period
so that we can understand the full effects.
Does that really happen in the real world?
Do things change one at a time? No, of course not.
Changes are always occurring from day to day in all parts of the industry.
But what this analysis allows us to do is to isolate one change
to find out how the economy adjusts to that change, okay?
So now we're at point B, okay?
At point B, if there's no further change,
the economy is completely adjusted.
There's now more red wine being produced
in response to consumer demand,
and this is the idea of consumer sovereignty,
and less of other beverages, okay?
Resources in red wine, price of red wine is higher.
Those types of labor that specialize in producing red wine,
they have higher wage rates.
Other types of labor in other industries
They're specific to other industries, other types of land have lower rents and lower wage rates, okay. So the whole economy has adjusted.
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.
And then you get a large influx or an influx of entrepreneurs into that industry, okay?
Now, if there was another demand, increase in demand for red wine, okay?
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?
You'd have, this should intersect now with this new supply curve, right? I didn't bring it up far.
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.
This is the theory of consumer sovereignty. This shows how the price system serves consumers.
It's not ultimately entrepreneurs making these decisions.
Entrepreneurs are making the decisions to expand supplies of, let's say, SUVs
and reduce supplies, let's say, of station wagons and large sedans, which occurred in the 1990s and 2000s,
precisely because consumers have shifted their demand.
So it's what the law of consumer sovereignty tells us, and it might also be called the law of long-run supply.
What that tells us is that it is the consumer demand that directs the allocation of resources in the economy.
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.
Every point on this line represents a final state of rest.
And that point will manifest itself if the demand curve shifts out to that point, all right?
Does it exist in the real world? No, it doesn't. It's a tool of analysis.
That long-run supply curve doesn't exist in the real world.
What does exist in the real world? These immediate-run market-date supply curves.
They're always moving in the direction determined by consumer demand,
but before they ever get to the final state of rest, what happens?
Something else changes. There's changes in other industries. The demand for vodka goes up.
And so you get other changes. So in the real world we have continual changes.
But if you stop those changes for a moment and allow them to follow themselves through,
all adjustments to follow through in response to those changes,
you would always get the economy coming to rest at some long run final state of rest.
And that allows us to trace out, as I mentioned before, the effects, the long run effects of any change.
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.
This analysis explains what happened to mainframe computers.
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
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.
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.
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.
Okay. A couple of interesting examples of this law of long-run supply, okay.
Here though, it's really not the consumer that's operating, but it's a government, but let me explain what I mean.
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,
There was talk that the West should put an embargo on wheat and other agricultural products to the Middle East countries like Saudi Arabia.
It never occurred, this sort of reverse embargo.
But the talk about that caused the Saudi government to react.
They wanted to produce, they wanted to become self-sufficient in wheat.
Right now, it's a desert country, it's very, very expensive to irrigate.
How could they get their farmers to plant wheat?
The world price was back then, I think, 85, I didn't bring the clipping, it was something like
$85 a ton for wheat.
Well, guess what happened?
The Saudi government
became,
or Saudi Arabia became self-sufficient
in the production of wheat.
Not only self-sufficient, they began to export wheat.
Well, how did they get their farmers to grow all this wheat?
They simply allowed, they simply
subsidized the growing of wheat to the tune of $1,000 per bushel, compared to $85 per bushel.
That more than covered the irrigation costs and returned a profit to farmers.
So what happened? They moved out along this long-run supply curve and they produced a tremendous amount of wheat.
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.
We'd all be out in our backyards planting wheat, right?
You have a tremendous movement of, this shows a tremendous movement of resources into an area when the price goes up.
But it doesn't happen immediately. It happens over time. That's why we use the long run supply curve.
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
to throw out or to impose sort of the democratic decision for Aristide, who had won an election.
And what was interesting was that the U.S. embargo caused an interruption in the supply of oil products to Haiti,
And prices of gasoline in Haiti shot up to something like 65, this is a poor country, 65 dollars per gallon, okay.
However, the market operated. What happened was that at that high price, it became very profitable to sell gasoline in Haiti.
So you had a lot of smugglers who were taking risks and slipping through the U.S. embargo.
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.
And what was interesting was that the U.S. Embassy, our embassy there, could not get gasoline because of this embargo.
So they, too, turned to the black market. They began buying from smugglers, okay.
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.
So smuggling is always defeated, I'm sorry, embargoes never work completely right.
They're generally defeated by the heroic smugglers who are reacting to the much higher price, and that's consumer sovereignty operating.
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.
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.
And the supply side simply responds to demand.
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?
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
and then processing it into hard drugs in the Middle East and then smuggling it in.
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?
When people's value scales change and the demand curve falls all the way to the left, what happens?
The drug cartels just fall apart. In fact, the U.S. has created the drug cartels.
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.
So the more the U.S. government reduces the supply, the higher the total revenue that the drug smugglers earn.
What happens is that the smaller drug smugglers who can't get protection from local governments and so on,
who can't get a private army to protect their drug assets, they go out of business.
So it's only the larger cartels that can exist in this area where there's a war,
There's a little war going on where you have U.S. advisors in Colombia fighting against drugs.
So they're creating these cartels with these weapons and so on, and they're financing them.
The more you restrict the supply along an elastic demand curve, the higher the total revenue is.
The more money they have to pay off the police and the government and so on.
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.
Okay. Yes. Alex, you had a question. Do you want to ask it?
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.
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.
So that's a good point, Alex.
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.
And that is the fact that people are continually saving and investing money in new and better capital goods.
And a lot of this investment also goes into research and development of new technology.
So with new technology coming on the market, embodied in new and better capital goods,
even with the same amount of laborers, what happens is that you get an increase in supply,
because the cost of production fall.
So take, for example, the hand calculator.
That came on the market $350 back in the early 1970s, and there may have been some profit there.
But as you got competition, the price began to come down.
But at some point, with the given technology, the profits are wiped out, let's say, you know, when it's $200.
The only way to continually make new profits is to find new and better ways, less costly ways of producing hand calculators.
Same thing is true of PCs.
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.
When new technology comes in and more and better capital goods make labor more productive, the unit costs of producing these things falls.
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.
So prices for PCs fell from let's say Y represents $20,000 all the way down to somewhere down here to $500.
That was done because or that resulted from the tremendous improvement in technology that occurred in the 80s and 90s.
So then the question becomes if a free market economy or economy that depends heavily on the market such as the US economy
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?
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?
Well, what else is occurring? What else occurs day after day after day, literally?
It happens in New York City at the open market desk of the Fed.
Well, the Fed is continuously printing new money.
So you have two competing influences on long-run prices, at least since World War II.
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.
So in some industries where the market is winning, such as in high-tech industries, you get this situation.
This is the computer industry as an example.
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,
Supply curves are shifting to a greater extent, so therefore the trend of prices in many high-tech industries is downward.
And by the way, this graph represents the trend in the 19th century, throughout the 19th century.
Prices continually fell except during wartime in the U.S. and British and other industrial economies.
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.
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.
And prices in 1896 were lower than they were at the beginning of the 19th century.
So the natural trend of a market economy, which doesn't face inflation,
let's say a market economy on a gold standard in which there is a little bit of mining of new gold,
so therefore you do have some increase in the money demand,
but the natural tendency is for supply to shift out and drive prices down.
Now, after World War II, for most industries, we got something a little different, a different price trend.
Let's take the car industry.
You see what happens here. Even though there is some productivity going on,
I mean, plants are becoming more mechanized, the Japanese are using, you know, robot-controlled plants,
plants are becoming computerized and so on.
You have supplies of cars shifting to the right, but on the other hand, okay,
you have increase in demands for money, or increase in demand for the car, fueled by monetary inflation,
that is outstripping the shift of supply. So the trend is what?
Trend of Prices is upward, okay?
Think about it.
An automobile sold for something like $750 in 1910 dollars
before mass production of automobiles.
When Henry Ford introduced mass production, okay,
through the assembly line,
price of automobiles fell to something like $360 by 1914.
Okay, but prices have gone up.
Why haven't the price of automobiles gone down?
Well, one reason is quality has gone up also.
But still, you wouldn't expect the price of an automobile
that you could get for $360 in 1914
to be something like $20,000 today.
Much of that increase in price is not
due to the quality increase.
Most of it is due to simply monetary inflation.
Take men's suits.
Men's suits cost about an ounce of gold back then, which was $20.
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.
We're going to talk about the interrelations of prices, okay?
Goods can be related to one another in one of two ways, as substitutes or as complements, okay?
Substitutes means that the good, to some extent, can serve the same end as another good, okay?
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.
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.
They're used together in the consumption experience. Those are known as complements.
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?
Let's take the following example. Let's say, this is an actual example.
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.
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.
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.
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.
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.
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,
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.
or when the price of DVD players began to fall
and DVDs, people began to shift away from VCRs
and VCR players.
But now
something comes in, an analytical point comes in, and that is the
elasticity of demand.
If the demand for the good whose price is falling is
elastic,
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.
That money has to come from somewhere. Assuming the money supply is fixed, people then reduce their spending on substitutes.
That is, the demand for substitutes fall.
Now that's the usual case in a market economy. In a market economy, each good has many substitutes in the developed market economy.
So when the price of that good falls, people tend to purchase more of that good and spend more on that good.
If you spend less on that good, total revenue goes up and they reduce their demands for other goods.
But sometimes it's not the case.
It could be the case that the price of the good falls some type of food or food in general.
The demand for food is inelastic.
Say the price of food falls or certain food products fall and people spend less on the good at the lower price.
In that case, even though the price of that good is falling, what happens to the demand for substitutes?
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.
So if the price of certain food products in general fall, people have more money to spend on other goods.
So that results in an increase in demand for these other goods.
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.
Now, let me just give you some examples of how the substitution process operates and what it actually did.
in real cases. When the price of hand calculators fell,
people spent a lot more on hand calculators over time, as the price came down from $350,
what happened to the demand for slide rules, those old plastic
sort of apparatus by which you did the same sorts of calculations
as hand calculators? The demand fell almost to zero.
They're not produced anymore. Same thing happened with typewriters.
When the prices of PCs and word processing programs came down, people substituted those for typewriters.
In fact, just yesterday, Lauren here at the Institute was in another room and I heard a strange sound coming from the other room.
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.
And anyway, she says, you know, people laugh at me because I've never used one of these before.
Typewriters are, you know, the demand for typewriters fell to the point where they're, you know, they're not produced anymore, okay?
I don't think they're produced anymore.
So someone in their mid-twenties has never used a typewriter, okay?
She was typing labels.
You've used it?
So you will use typewriters? Okay.
But I don't think they're, I don't think they're still produced.
I mean, yes, go ahead.
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?
For a very specialized market, it has a very high per-unit cost, so the average cost goes up.
Now, are you talking about nostalgia buying? In other words, people just buying older ones?
You don't mean like collectors, you mean actual...
You know, you go to the electronics store and they're charging more for a turntable than they did in the 80s.
Yeah, that's because of... Well, part of it is this relentless monetary inflation,
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.
Yeah, that's a good point.
Okay.
Oh, did you have a question, Patrick?
Okay, now that also happens, that is the demand for goods that aren't produced
any longer
on the part of collectors, okay, and that shifts the demand curve to the right and
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.
Then the good becomes something a little different, its nature is different, it becomes a collectible.
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.
What's interesting is that here in the United States we have sugar price supports.
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.
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.
It's a much more expensive process.
So people here in the U.S. can pay anywhere from three to four times the world price of sugar.
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?
Because corn syrup is a substitute for sugar.
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.
And the reason is that the price of sugar is so high that there was a substitution out of sugar.
What is interesting is that obviously the corn syrup producers compete with these sugar producers.
And yet they are allies.
Whenever Congress threatens to take a new look at the sugar programs and threatens to repeal them,
not only do the sugar producers troop down to Washington, but so do the corn syrup producers.
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.
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?
Yes, Michael.
Right, that is to say that in terms of substitution or substitution effects, unskilled labor is a substitute for skilled labor.
So let me give you an example.
Let's say you have two technologies for digging a foundation for a new building.
So, let me give you an example. Let's say you have two technologies for digging a foundation for a new building.
Let's say in New York City you want to dig a foundation or even a smaller building.
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.
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.
Okay. Technology two is to get the foundation dug by using a skilled union worker working with a backhoe.
So you hire the skilled union worker, let's say, who earns $15 an hour.
So it's one skilled laborer earning $15 per hour for eight hours,
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.
So, under competition, the two technologies have to be equal, okay?
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.
They have to get the ditch dug at the same price, okay?
So it's very difficult, then, for the construction union to get a raise.
Let's say they'd like to have their salaries raised to $20 an hour.
But if they did that, they would price themselves out of the market,
many of the unionized firms would go out of business,
and demand would shift to non-unionized firms.
Well, one way to get some room for raising their wage rates
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
So now the demand for the non-unionized firms begins to fall off. Demand for unionized firms rise.
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,
in which case they would then earn, the total cost of technology would then be $240.
So they can push for a wage increase to $20 an hour, in which case the technology would be $240.
So that's why unions, despite all their talk about brotherhood and worrying about their less well-paid brethren,
why unions really support increases in minimum wages.
And you can look back in US history and see this.
Back in the 1950s when the minimum wage was raised, and it was raised a number of times, 50s and early 60s.
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,
and they would show people to their seats with flashlights. The movie theater wasn't as well lit as it is today.
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.
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.
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.
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.
Now, who produces automatic elevators? Skilled workers. Who services automatic elevators? Skilled workers.
So you had unions of these people benefiting from the high minimum wage that displaced the low skilled elevator operators.
So that's explained. That issue can be elucidated by this analysis of substitutes.
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.
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?
Well, since people began drinking fewer cups of coffee, the demand for sugar fell, because sugar is a complement of coffee.
Or what happened to the demand for SUVs more recently as the price of gasoline has risen.
The price of gasoline rises because of the cut in supply, people will then reduce the quantity of demand of gasoline,
Gasoline, which means they'll reduce their demand for vehicles that use a lot of gasoline.
So there's an effect on the complementary good, which is an SUV.
So demand for SUVs fall.
A very interesting phenomenon was when the first VCR technology or VHS technology was introduced,
and competed with beta, but at the time when they were introduced they were very, very high priced
and very few households had VCRs.
And so what you saw initially when the price was high
was that there were very, very few mom and pop rental stores
around in the early 80s, okay?
There were no big chains.
But as the price of VHS technology dropped
and more and more people began to buy VCRs,
obviously the demand for the complement to VCRs,
okay, video cassette recording tapes
or video cassettes themselves,
The demand for those things went up and you got suddenly popping up huge chains like Hollywood, Blockbuster, and so on.
Why? Why all of a sudden do we see these huge chains all over the place?
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.
And so you had to have more stores renting them and so on.
So, two things I want to mention about complements. First of all, the elasticity of demand is not relevant to complementary goods.
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.
Regardless of what the elasticity is for hamburgers.
What we do know is that people will eat more hamburgers and therefore the demand for cheese will increase because they're complements.
If it's inelastic, there will be a small increase in demand for cheese, because people are only eating a few more hamburgers.
But if it's elastic, people will buy a lot more cheese. The demand will increase a lot more.
Secondly, about complements, remember all goods are substitutes to some extent, even though they may be complements.
So you have the two relationships intertwined.
And so if, let's say, the price of hamburgers shoot up a lot,
I'm sorry, I'm trying to think of an example where you would have people using less of the complement.
Well, let's just leave it at, because I can't think of a good example right now,
Right now, let's just leave it at that. You would have both substitution effects and complementary effects occurring for certain goods, okay?
And as I said before, the substitution relationship is much more pervasive than the relation among complements.
Okay. I want to put up a diagram and then talk about one other type of good.
The diagram that Rothbard has in his book, Man Economy and State,
That really sums up what we've been saying about substitutes and complements.
Okay, here's what the diagram will tell us, okay?
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
is that the demand for the other goods, the changes in prices of other goods,
or actually they're assuming, let's see, a change in price of B, C and D.
So A is a good that's going to be substituted.
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,
What's going to happen to the prices right of the other goods?
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,
and the demand for other goods will go up, so they'll move in the same direction.
On the other hand, if there's a fall in the stock of A, or if the demand for A is inelastic,
as a result of a change in its stock, the prices and demands of other goods are going to move in the opposite direction.
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.
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.
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,
that means that the demand for other goods like cheese, ketchup and so on, hamburger buns, that the demand for other goods will rise.
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.
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.
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,
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.
So that's sort of a summary of what we were talking about.
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.
And inferior normal goods are discussed in relation to changes in people's incomes.
So, for example, if people's money income falls, let's say during a recession.
Some people are laid off, other people don't get bonuses, other people take wage cuts.
For all those reasons their money income falls, they may substitute lower price goods that serve sort of the same end.
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,
People demand more of those. And they're substituted for things like beef and expensive cuts of veal and so on.
Also, during a recession, you see the demand for used cars going up, but the demand for new cars falling.
A used car then, again, moves, the demand for the used car moves in the opposite direction of people's income,
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.
simply means that people tend to rank it higher on their value scale when their incomes are lower, okay?
Other people go out to McDonald's more and they go to steak restaurants less when there's a recession, okay?
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
and the demand for steak and other more expensive foods rise, okay?
And there's two interesting examples of this that I want to just read to you.
One has to do with the recession in 1990-1991 that the U.S. had gone, had went through.
It's a short little piece in the Wall Street Journal.
It was called the Hot Dog Index.
And it says the following.
During a recession, hot dog sales rise, says Hebrew National, noting strong gains in 1974 and 1982.
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.
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.
Well, that's their little idea of a joke there, okay?
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?
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?
My income has fallen, I've never resorted to lipstick, but anyway.
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.
When lipstick sales go up, people don't want to buy dresses, says Leonard Lauder, chairman of Estee Lauder Company.
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.
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.
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
Because when people's incomes go down, the demand for lipstick rises.
That really ends the lecture on supply and demand.
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.
Okay, at least the analysis of price controls uses supply and demand.
So let me first start with sort of a generic explanation of what a price control is, a maximum price control,
and then we'll get into some actual case studies.
So let's start with what we call a price ceiling.
Let me zoom out.
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.
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,
even though the buyer is just as involved, just as much a voluntary partner of this illegal exchange.
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.
Let's assume that Congress passes the price control on milk with the best of intentions.
That is, they want to make milk affordable to people of low income.
The equilibrium price is $5, and that $5 is 13 million gallons of milk sold per unit of time, let's say per week.
Now, if Congress set a price ceiling at $6, that is, above the equilibrium price, in economics we would say that's non-binding.
It doesn't stop any exchange because the price is $5.
At $5, supply equals demand.
Everybody who wants a gallon of milk can find a gallon of milk
and every seller that wishes to sell a gallon of milk can find a willing buyer.
So there's no reason for the price to rise above that,
at least with the value scales that produce this demand curve and with the given supply.
However, if Congress imposes the price control below the equilibrium prices it has here,
I've shown here at $2, let's say, then it is binding, then it does prevent a number of voluntary exchanges.
In fact, what happens here is that the quantity demanded increases at $2, it's much higher than it is at $5.
So instead of 13 million gallons per week, people demand 25 million gallons of milk per week.
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.
in the market every week, at least in the short run.
So we have an initial shortage of 12 million gallons.
That is, people would love to get their hands on 25 million gallons,
yet there's only 13 million available.
So what are some of the effects besides the shortage?
One of the first effects is there's non-price rationing.
Sellers know that they can sell everything they have at the price control price.
So they begin to indulge their personal preferences and prejudices.
If you're just against the law, they'll find ways of doing it.
For example, during World War II, when there were price controls on many household items like beef and milk and so on,
the local butcher or the local grocer would keep some of that in the back or under the counter
and only sell it to his family members or his best customers, okay,
and turn away strangers that were cruising through the neighborhood trying to find beef and milk, okay.
Also, these controls cause people to indulge in racial, ethnic or religious discrimination.
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?
The government then steps in and introduces political rationing schemes.
For example, when we had price controls on gasoline, we had shortage of gasoline in 1979.
They imposed the odd even day rationing scheme, which meant that if you had an odd number,
if your license plate ended in an odd number, you could only come on certain dates,
let's say Monday, Wednesday, and Saturday to get gasoline.
And if it was on an even number, then you'd come on the other days.
You can produce a shortage of almost any item, as the Soviet Union has shown us.
If you saw the movie Moscow and the Hudson with Robin Williams, what were people lined up for at the beginning of that movie?
Well, it was just a common item. It was toilet paper.
To hide the fact that they were producing very few consumer goods, they kept the price of consumer goods very low, which created shortages.
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.
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,
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.
Okay, so that was, you know, that was the whole mentality that, you know, you just got on lines and waited.
Then black markets crop up, okay? You can create a black market in anything, okay?
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.
You'd see some, or let's say you put price controls on candy bars, okay, you kept them very low.
You'd see organized crime getting involved in candy bars.
You'd have guys in alleys near schools saying,
take kids, you want to buy a hot candy bar, rather than drugs.
So organized crime will get involved in selling these things.
You get a spillover demand.
People who are frustrated in trying to find milk begin to turn to what they believe are partial substitutes, soy milk, fruit juice, soda.
The demand for these things will go up and prices in these markets will begin to rise
and then there will be pressure to put price controls on these goods, okay?
Then you get over time, because it's unprofitable or not as profitable to produce at $2,
you'll find over time the less efficient dairy farmers going out of business along this long run supply curve
and the more efficient ones cutting back.
So the marginal producers go out of business and the ones that are making higher profits,
they remain in business but they produce much less.
So now, over time, the shortage gets even worse.
So now, instead of 12 million gallons of shortage per week,
now you only have 5 million gallons being supplied and 25 million demanded.
You have a huge, massive shortage, okay?
You get to the point, then, where Congress, the shortage gets so bad,
that Congress either repeals the price ceiling on milk, okay, or imposes further controls.
In other words, they say, well, if it's not profitable to sell milk at $2,
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.
And then there's an incentive to go even further and put controls on the inputs into those products,
until the entire economy is brought under price controls and you have universal shortages, and you're back at the Soviet-style economy.
Now let's talk about rent control. Let me give you a real, let's talk about some real examples.
A rent control is a maximum rent that can be charged by law.
New York City is the best example of rent control. They've had rent control since 1946, all during peacetime.
Most cities repealed their rent controls after World War II, but not New York City.
So, let me give you a simple example of what a rent control might look like.
Okay, let's take a small city where there's a certain amount of apartments available.
Okay, so there's a given stock, it's fixed at any moment in time, it's 700.
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.
Everyone who wants an apartment can find an apartment at $900, okay?
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.
Suddenly, there are more people that want to move from the suburbs into that city to be closer to their jobs.
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.
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.
So, one of the first things that happens is when you discuss rent controls, you say,
well, you know, we should take the rent controls off and the shortage in Manhattan and other parts of New York City will disappear.
People say, well, what do you want? People living out in the streets?
Well, what happens is that when you have rent controls that are very, very much below the market price, people use space uneconomically.
So, if you would allow prices to rise, it wouldn't necessarily be the case that people were thrown out into the streets.
What you would have is, on the one hand, you might have like two students living in a two-bedroom apartment.
They would take two roommates in at the higher rent. So, each per person space would be conserved.
Also, let's say you have a widow that's living alone in an apartment. She's been there for a while.
She's on a fixed income. Well, her alternative is not to get thrown out of that apartment.
She can easily take in other single women to share the apartment with her.
So people make these types of arrangements. In fact, back in the 70s and 80s, when certain prices were allowed to rise,
there were these very small luxury apartments being built, and they could charge market rent.
The rent controls were loosened or taken off of new luxury apartments and the prices were well over $1,000.
What happens was that you've got a lot of people living together in what was called mingles living.
They weren't in any sort of romantic relationship, but men and women were living two and three to a very small apartment.
One-bedroom apartment, simply to conserve on the cost.
All right. Now, what are some of the... Actually, let me mention...
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.
But let's look at the other effects before we get to that.
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.
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,
what they're going to do is to cut back on the maintenance of the apartment building, okay?
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.
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.
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?
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.
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.
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.
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.
And there's a very interesting and moving article by a former landlord.
It was written in the 1970s. He was a Hungarian immigrant.
And it's entitled, I Was a Slumlord.
He says, I was a slumlord. Here's how I came to be one.
I was born 69 years ago. I learned the craft of cabinet making my native land Hungary.
This would have been my 50th year of working in wood creating beauty.
And he says, my name is well known and well respected in the trade.
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.
With changes, improvements and additional construction the factory cost me about $65,000.
Then he says a few years later he bought another building which was adjoining and he got it at a bargain price.
He says with the idea of expanding my workshop into it or using the lot for parking I bought it.
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.
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.
So he's not even covering his out-of-pocket expenses like utilities and taxes.
He says, the building was in poor repair when I bought it.
By now it is the favorite hunting ground of every city inspector.
The building needs a new roof, new walls, new ceilings, new plumbing, new wiring, new doors and a new heating system.
It needs about $15,000 worth of repairs.
Now remember, he's not even making enough to cover his operating costs, let alone put any money back into the building.
The building now has a gross income of $2,600 a year, of which I am paying for taxes in heat $3,000, okay.
So does he have any incentive whatsoever to put any money back into renovating? Of course not.
So far I've been fined four times for failure to comply with orders to correct building code violation.
I was summoned to court a few weeks ago. I explained my predicament to the judge.
The judge, he assured me of his sympathy, fined me $40, and promised me that my next fine would be higher.
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.
An hour later, I made the same offer to the Protestants. Again, the answer was no.
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.
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.
This sounds like an easy way out, but my lawyer tells me it cannot be done without my being legally financially responsible.
So here I am with a building assessed by, the city assesses the building at $21,000.
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.
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.
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.
As an extra inducement, I threw into the bargain my old factory building, which cost me close to $70,000 for nothing.
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.
and the price level is much lower, for $30,000 to be paid without interest in six years.
So in present value terms, it's even much less than $30,000.
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.
At 69 years old, I am too old to start a revolution or to fight city hall.
This is, I will barely miss my shop or I spent 49 happy years, but I am no longer a slumlord.
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.
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.
Okay, so what happens is that you begin then to abandon these buildings, alright, and not maintain them.
So you get a degeneration into slums and then into abandoned buildings.
And what I want to do last before we stop for today and I'll continue this tomorrow is to show you some pictures.
The economists have often said, by the way, that the most efficient way to destroy a city, besides bombing, is to impose rent controls.
Okay, so, to show you some pictures of bomb damage in World War II, and have you ever seen these pictures?
Yeah, I think it's a good indication of what rent controls can do.
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.
Okay, let's look at another.
Is that bomb damage or rent control?
That's rent control, that's the Bronx.
Bomb damage or rent control?
That is, that's bomb damage, that's Hiroshima.
The bomb damage of rent control, let's see what that is, I'm not sure. That's Nagasaki.
once again this is this is you know this is bond damage about that that's rent
Rent Control. That's Rent Control. That's Rent Control and that's the Bronx.
Why is that here?
No, those were nuclear, I mean the nuclear destruction.
Patrick, come up here so I can slap you. Okay.
Bomb damage or rent control?
Yeah, I think you're right. I think that's rent control. That's rent control.
Flying Beast, right?
Bomb damage to rent control.
That looks like bomb damage to me.
Let's see if it is.
That is Nagasaki.
But let's see.
I've got two more.
That's definitely rent control.
Yeah, that's definitely rent control.
That's South Bronx.
Now many of those buildings that you see standing,
not all of them, but many of them,
are structurally sound, and they can be renovated.
If there were no rent controls, they'd be renovated.
Now, this is back in the 70s and 80s when all this was occurring.
And finally, what about that?
Yeah, that's rent control.
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.
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.
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.
What would people in the accounting profession do here in the United States?
They go into other professions that were not controlled.
Well, the same thing is true in New York City.
Since the 1980s, we've had this massive conversion called condomania into co-ops and condos.
In other words, what they did, since there's no controls on the price that you can sell these apartments at,
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.
So in other words, they transformed them into or converted them is the word.
They converted them into co-ops and into condos.
So that what you got then, as a result of the abandonment, I wanted to show the Long One Supply Curve.
Here's where the Long One Supply Curve is relevant.
You begin to get a disappearance of, what's not here, a disappearance of the, yeah.
A movement down along this Long One Supply Curve.
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.
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.
One last, actually, maybe we'll just take the next few minutes, unless people have questions, and then just finish the rent control section.
We want to ask the question, who benefits?
We always want to ask the question, cui bono, when we talk about government programs.
Who benefits? Who gets the benefit? Who is victimized?
The traditional view, or the conventional view, is that, well, tenants, well, they're poor, they're noble, they're the majority.
they benefit from rent control
and landlords, it's a small group of greedy, greedy people, they're the ones that are victimized by rent control
but that's not actually the correct
analysis of the situation
in fact, the tenants that are lucky enough
to have those apartments
that are
in such short supply are the ones that benefit
what about the people between
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?
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.
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,
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.
If you didn't want to get married and live with the in-laws.
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.
They can't, they can't find apartments, so they wind up living with their parents or postponing their marriages.
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.
Now why don't politicians take their desires into account?
They don't because prospective tenants, most of them are outside the area and they don't vote.
What about lower income tenants? Supposedly the group that's supposed to be the primary group that benefits.
They're living in abandoned buildings or buildings where the city is taken over and the city is the worst landlord.
Or they're living in these no-frills buildings which have not been maintained and which are falling apart.
So lower income tenants are on the victim's side. Who are the beneficiaries?
Middle and upper income tenants who have very, very nice plush apartments at much below market rents.
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.
The property tax that was kind of fast.
I was involved in the election in Vancouver, and the city was going up just one landmark.
And it seemed as though they were trying to shut down all the housing for poor people,
and then they would even fair out a demand on public housing.
I don't know, it seemed like something like this was happening, but I'm not sure if rent control
I don't know about property taxes. The question is, can property taxes have the same effect as rent controls do?
Property taxes would certainly make owning buildings less profitable.
And if you reduce the profit, you are going to have an effect on the quality of the property,
because people will then cut costs by maintaining the building less well.
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.
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.
Rent Controls.
This was in the Wall Street Journal.
Let's see if I have it here.
Yeah, here it is.
You'd be amazed at who lives in rent controlled apartment buildings.
Yeah, people from all walks of life have lucked into rent controlled apartments.
Now, if for some reason your family was in the apartment with a tenant before 1946, they're paying extremely low rents, okay?
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?
If it's below the market rent, okay?
But if tenants don't move out, then the only increases the landlord can get in his rents over time
is if he can show hardship, that costs have risen a great deal
and that he has to raise the rent to cover the costs.
Which means that the rents stay much below market rents,
especially for people whose families have had the apartments since before 1946.
In any case, people from all walks of life have lucked into rent-regulated New York City apartments.
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.
Now let's go into some of the prices.
Philippe de Montebello, who used to be the director of the Metropolitan Museum of Art,
very high paying job, pays about $1,900 a month for a seven room apartment on Fifth Avenue.
So he's paying $2,000 a month. Now, that market rate is $6,000 for that apartment.
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.
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.
That's half the free market rent, so he's getting a huge subsidy.
And there's a few other really interesting people.
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.
Anyway, she pays about $2,900 a month for ten rooms on Central Park West, which is a fraction of the market value.
The most egregious example, I think, is this entertainment lawyer, Alan Grubman, who is Lizzie Grubman's father, the famous car crasher.
She crashed her SUV, I think, into a notorious case a few years ago.
In any case, he represents Billy Joel, Madonna, Michael Jackson, David Geffen.
He pays about $9,000 a month for his rent-stabilized apartment.
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
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?
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.
And you get rid of the tendency to slums, you get rid of the massive shortage, you wouldn't have any of those problems.
But rent vouchers don't benefit the people that vote, who are the upper and middle income tenants.
Now, the free market policy is even better than that. A good example is Houston.
Back in the mid-1980s, I was in Houston giving some lectures.
And I noticed that rather than landlords and tenants hating each other, as they do in New York City,
because obviously the landlords are always trying to get higher rents and trying to get the tenants out,
so they can raise their rents a little bit or they're not taking care of the building.
So there's sort of a class warfare between tenants and the landlords.
Instead of that, I was staying in an apartment with a friend.
He's a landlord and he says hello to his landlord.
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.
Why do landlords and tenants hate each other?
Now here, down here you might not see that, but in the North, on television all the time,
you see tenants continually boycotting the landlords and demonstrating against them and so on.
There's a lot of hatred there.
But in Houston, there was a building boom.
And when I was there, in fact, there was rent, there were apartment vacancies.
Not only wasn't there a shortage, there was a huge surplus of apartments in the mid-80s.
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.
So if you get rid of some of the restrictive building codes and allow entrepreneurs to build lower cost housing,
you will get more than enough housing at low rents for the low income tenants.
In fact, when I went to college in Boston where the unions are very, very strong,
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?
That's the type of low-cost housing that, because of unions and their influence on building codes, do not allow to be built.
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.
Okay, I'll stop here and tomorrow we'll talk about other types of price controls.
Thank you very much.