Ryan Bourne on The War on Prices

What’s in a price? Good question. How can you be “enslaved” to something like a price, to something that doesn’t eat, sleep, or breathe? Good question. What does it mean to wage a war against this inanimate enslaver? Good question. 

Join me today with Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato institute. Bourne paints a picture of a bloodless yet economically catastrophic war. It's one which leaves us vulnerable as the weapons of the market (dollars) diminish in our pockets (inflation) and the state of war (price controls) depletes the quality and quantity of our conquests (market interactions) until they are vastly inferior to the opposition’s (free markets). 

Want to explore more?

• Russ Roberts, Where Do Prices Come From? at Econlib.
• Michael L. Davis, Price Gouging is Fine, but Humans are Better, at Econlib.
• Michael Munger on John Locke, Prices, and Hurricane Sandy, an EconTalk podcast.
• Rosolino Candela, Can Price Controls Fight Inflation? at Econlib.
• Michael Cannon on Prices and Health, a Great Antidote podcast.

Never miss another AdamSmithWorks update.

Follow us on Facebook, Twitter, and Instagram.

Transcript

Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliette Sellgren, and this is my podcast, the Great Antidote- named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.AdamSmithWorks.org.

Welcome back. There's a little something special sitting at the core of economics, and that is prices. We talk about them sometimes, but mostly as a way to get from point A to point B. We don't really pay too much attention to them. They're just a number or sometimes a variable that we use without thinking about how we get there, why it's important, what it means, which is fine. It's important to have a method of doing economic thinking, and if that helps us do it, that's great. But one of the big critiques of economics is actually that prices dictate the lives and livelihoods of so many people, right, like capitalist system, this and that, and we're slaves to prices. So I kind of want to talk today about what the deal is with that. On June 5th, 2024, I'm excited to host Ryan Bourne. He is the R. Evan Scharf chair for the Public Understanding of Economics at the Cato Institute, and he's also the editor of the recently released book, The War on Prices. He's going to talk to us about this and more today. I'm so excited. So welcome to the podcast.

Ryan Bourne 

Great to be with you, Juliette.

Juliette Sellgren

So the infamous first question, maybe it's famous, I don't know. What is the most important thing that people my age or in my generation should know that we don't?

Ryan Bourne (1.50)

That's a big question to start off with. I'm going to stick to something economics related, and I think it's just that to always remember when we see those big kind of summaries, scare statistics that we all hear, whether that be GDP or inequality within a country or something else, just remember that those are like aggregate statistics. They a reflection of millions and millions of decisions that are made every day, tons of different actions, trades, inheritances, endowments, different policies, and so alone, they don't really tell you much about the world because just looking at the outcomes, we don't know what in effect caused this stuff. And so when you see a big topic like inequality, you might see this summary statistic, but you kind of have to remember behind that number is lots of different human action and the only way to change that number really is by affecting human action in some way. So I would just caution looking, taking big summary statistics that you hear at face value and often try to take a step back and think of all the different actions and decisions that went into generating that outcome.

Juliette Sellgren (3.01)

Yeah, that's a great point. I was recently reminded of this because last night I went to this talk that my mom gave on federal paid leave programs and she cited a bunch of statistics and spent the talk talking about what they meant, why it was important, kind of the human action behind it. And in the Q & A, almost every single question, someone would come up with their phone and cite a different statistic, and I was sitting there, we're just throwing numbers at each other at this point, and she responded very well, unsurprisingly. But it is hard when you're having these conversations. You want to rely on data, you want to rely on these numbers that we think tell us so much, but in no way that's the tip of the iceberg really. So this is a great reminder. Something that I guess ties right into what we're going to be talking about is a price is kind of a statistic in a way.

We use prices to measure a ton of stuff, but it's hard to understand what goes into a price. And as I was reading, I kept thinking this is so [F.A.] Hayek/The Use of Knowledge in Society. But of course if you're like a non-Hayek geek or I mean even if you're into economics, it's hard to remember what goes into a price because we don't talk about it so explicitly super often. And this book was pretty refreshing because it focused on prices themselves. But before we get into what the war on prices even is, what is a price? What does that tell us?

Ryan Bourne (4.34)

Yeah, so I guess if you look at the dictionary definition of a price, it would say that the amount charged usually in money terms by a seller of a product. But that's not what we are really getting at when we're thinking about market prices really. Market prices, as you say, the kind of bottom up manifestation of lots of different supply and demand forces in the economy. So prices are kind of information at one level, they reflect the relative scarcity of a product, they reflect a whole bunch of different factors. If you think about the price of bread that reflects the costs of growing wheat, it reflects the cost of harvesting the wheat. It reflects the production costs that go into turning that into bread. It reflects on the demand side the amount of incomes that we have and how much we're willing to spend on bread.

It reflects different fad diets at various times, whether as a society we're keen on eating carbs. There's just so much that goes into that price through the supply and demand forces that operate within that market. So at one level, you're right, prices are statistics, that information arising to reflect the realities of the world. But that kind of gives scope to the second role that prices play, which is really their movements. Price movements provide us with incentives to change our behavior and as such, to use economic resources efficiently. So you might remember a couple of years ago there was a baby formula crisis, I believe like a baby formula plant had to temporarily close because of contamination, fell out of some FDA regulations or something. And as a result of that, the supply of baby formula to the market fell pretty dramatically and the price of baby formula went up.

Now that price rise actually reflected that information about that factory closing, but it had two crucial roles that are kind of underappreciated. The first is that if people went to a store to buy baby formula, they didn't need to know that the factory had closed because of this contamination or whatever. They just saw that the price of baby formula was higher than before. And so as a result, when they were making their purchasing decisions, they had to decide, well, is this really the best time for me to stock up on three months’ worth of baby formula, or should I just take enough for the next couple of weeks? So that price rationing helped to keep more baby formula on the shelves for people who really, really needed it and valued it highly right now. But the second crucial aspect is that increase in the price of baby formula also encouraged other suppliers of the product to perhaps ramp up production to pay drivers more, to give workers over time to try and increase production to get more to market. So in that crucial sense, that changing price, that elevation in price helped both diminish the quantity demanded and increase the quantity supplied relative to before, so that it eliminated that shortage in the market, or at least mitigated that shortage in the market. So prices, our information, they reflect the realities about supply and demand conditions in the world, but when those supply and demand conditions change, price movements encourage us, incentivize us to change our behavior to try and use the resource efficiently, as efficiently as possible.

Juliette Sellgren (8.09)

I see that as super beautiful because it is really information conveyed and also just it is humans adapting and acting in a way that's responsive to their environment and that's what we are meant to do. Whether or not that's a happy process, hopefully you're not upset about it, but I can see especially in the example that you were using. I remember after that there was this little mini debate about whether or not women could sell their breast milk, milk online, and this was a whole big thing that I think a lot of people thought was funny, but it was a very serious, it highlights a pretty serious thing, which is like, is there morality tied into it? Should we let people do that? Do you even actually want to feed your baby someone else's breast milk? There are biological reasons why that's maybe not great, but I guess the same thing would go for formula.

But I don't know, how do you talk to people about prices? When I think telling people, okay, adjustment is fine, you have to adjust just because the world can't adapt to you. But I think we're in a period where even culturally, everyone gets a participation trophy. So how do you tell people, well, it's not personal, it doesn't say that just because you want baby formula or used to giving your baby formula that you have to adapt just because of the world at the current moment can't necessarily adapt to you. I think that's hard for people to hear.

Ryan Bourne (9.44)

Yeah, no, it's definitely hard for people to hear. Prices, as you say, are a crucial kind of coordination mechanism in making the economy use resources efficiently. But you're right that when prices move, quite often we kind of pin blame on malevolent actors or we throw our hands up at the state of the world and think, well, this good should still be available [at] the old price. I think the really crucial thing to understand is that prices to a certain extent, another role that they play is as an allocation mechanism. And in the absence of using the price to ration the amount of goods or services that people are getting at any given time, you have to use some or other mechanism. Now that could be just queuing for products. So everybody has the same access to the product at the old price, but they just kind of queue and when the product runs out, it runs out.

It could be rationing on quality or size of the product. We might have direct rationing where you're only allowed to buy a certain amount, each type you are visiting the store. It may be that the company decides to skim on the amount or amount of product in the packet or whatever. So if we don't allocate by price, there still has to be some method of allocation, whether that is rationing, whether that is queuing, whether that's some bureaucracy determining who can get what. And quite often those alternative means of allocating goods and services can have much more distortive and damaging consequences. We've seen that through history. Indeed, one of the big conclusions of the book is that price controls through history have a long record of diminishing the quality of products, resulting in shortages of products and fostering black markets, because when you have situations in which a seller is willing to sell at a certain higher price and a buyer is willing to buy at a higher price, even if legally you kind of ban that sale, there's big incentives for individual traders and individual suppliers to still make it happen outside of legal means.

So I guess the key point that I would just reemphasize is that sometimes things happen and the reality of the world changes, and when that occurs, we have different options for deciding how goods and services get allocated. If you reject the price, if you reject the price's message and hold a gun to the price messenger's head and say, no, I want you to tell a lie about the relative availability of this product, we still have to decide to allocate the products in some way. And those other ways have their own big downsides as well.

Juliette Sellgren (12.29)

And I've done so many interviews talking about things like that, right, price gouging laws specifically, which of course plays a role in this book, but there's so much more that I want to get to. So I'm going to maybe leave that a little bit. But can we kind of describe/explain what does it mean to have a war on prices? So we know why prices are so important, just based on everything you've said and the examples, but we talk about the War on Terror, we talk about the war on drugs, two things that even if you think the war itself is bad, we can agree that to a certain extent, terror and drugs are not good for humans. So what is the war on prices? If prices aren't bad, what are we doing here?

Ryan Bourne (13.18)

Well, the war on prices is an attempt to lobby politicians and a political kind of movement to usurp the outcomes of the market process and try and politically control prices in some way. So as such, I think it's analogous to the War on Terror or the War on Drugs in the sense that it's about greater state power over these outcomes, but also leads to very destructive consequences like as wars tend to. So the kind of inspiration for the book really was after inflation hit, there were a whole lot of misconceptions and confusions about inflation that we thought were buried in the 1970s, that kind of returned the confusion between one price moving and inflation as an increase in the price level, an increase in all prices across the economy, the belief that temporary supply shocks could cause permanently inflated price level, the idea that workers' wage demands drove inflation, and indeed that this was all due to one-off factors or greedy corporations.

And as a result, there was a large section of the population who thought inflation was a result of malevolent actors rather than being primarily a story of monetary mismanagement. So I really wanted to write about that regression in thinking and how it created space for advocacy for really damaging policies like price controls or governments kind of jawboning companies to charge less because of the inflationary environment. But actually, the more I thought about it, and the more I kind of started putting together and commissioning chapters for the book, the more I realized that a lot of the economic mistakes laying behind that analysis actually translated to the pernicious spread of price controls in other markets in the US. Many states and localities now have controls on rents, more aggressive minimum wage increases, healthcare is riven with price controls. We have those anti-price gouging laws, we have junk fees, regulation and more.

And I think combined this kind of political determination and ongoing drumbeat for government to control prices because people perceive that prices are driven by malevolent actors or are bad for the poor or whatever, I think this has been expanding in our economy, and I just worry that if we kind of don't check it by taking those arguments head on the next time, something like a big inflation hits and people are worried about their cost of living, we'll see much more of a movement for more direct and damaging price controls to try and control inflation. So the war on prices I think may have been somewhat like a cold war up until this inflationary moment, but as a result of people being more worried about their cost of living and experiencing a period in which prices have increased quite sharply, I think the environment right now is ripe and there are a lot of proposals going around for governments to more directly controlled prices, which I think would be very damaging economically.

Juliette Sellgren (16.28)

I want to get into the three different segments that are addressed in the book. So inflation, price controls, value separately, but first you mentioned a lot of things, a lot of policies. Can you kind of maybe walk us through maybe an imaginary example, but a realistic example of someone walking through their daily life, where are they facing these pressures and how does it affect, I dunno, the average American, what are the, obviously rent being controlled means rent is cheaper. What does that look like in terms of the product you're receiving?

Ryan Bourne (17.06)

Yeah, so rent control is the most studied form of price control that economists have looked at over a long period of time, and it has a real long record of failure. So you're right, rent control is usually a cap on how much landlords can increase rents in a given year rather than a kind of direct cap on the price. And when that rent increase is held below, what markets would otherwise determine when that rent control binds, we call it, the major effect that we tend to see is that more people want to rent because they perceive it cheaper than before, but fewer landlords are willing to rent their properties because it becomes less profitable than before. So in reality, what that tends to mean is that landlords are more likely to sell their properties for owner occupation. So there's just fewer rentable accommodations. They're more likely to just put the property on AirBnB rather than rent it to longer term tenants, or they're more willing on the margin to leave it empty or let family members stay there.

So that's the quintessential story that we hear about rent control. Now, in reality, there's lots of other ways that landlords can adjust to prices being held below market rates when it comes to their rents. So one big incentive when rent control binds is that if you're a landlord making decisions on whether to invest in improvements in your apartment or whether to install a new kitchen or whether to replace the bathroom or whatever on the margin rent, being controlled and being held below market rates makes you more likely to think, well, that's probably not worth me doing right now. I can't actually recoup the costs through increasing rent. So as a result, the quality of rental accommodation tends to decline to reflect the lower price that the landlord is able to charge. So they're the two big effects of something like rent control. There tends to be a reduction in the quantity supplied to the market. There tends to be a reduction in the quality of the housing stock. And if those rent controls apply across a whole range of different properties including new builds, then it can also deter new buildings of apartments too. So big, big impacts on supply and big impacts on the quality of housing. So for many people living in some of the most prosperous parts of the US now that have these tight rent controls, as the longer those rent controls are in existence, the more we'd expect to see those two forms of adjustment.

Juliette Sellgren (19.46)

The thing that's so striking is that rent control is just an application of the economic rule that applies everywhere. The more prominent these sorts of controls become, the more that this exists in every single thing, right? So I think about groceries. I remember when eggs were super expensive after covid at one point. That was crazy. But what were people asking for? Rent, rent control, egg price control. And what would that have meant? Well, you'd probably get smaller eggs, maybe fewer eggs.

Ryan Bourne (20.23)

Yeah, no, I imagine we've tried food price controls in the past. In World War II, there was a price control on wheat, and actually the price control on wheat was held so low that it actually became cheaper for farmers to feed the wheat to various animals around the farm rather than sell it to the market. So actually there became a shortage of wheat for bread production, even though we needed a big increase in bread production to feed a fully mobilized armed forces at the time. So price controls when they bind and when they're kind of long lasting, tend to reduce the quantity supplied of the product just because it becomes less profitable for farmers to provide that product to market. Indeed, you can look back through history, the siege of Antwerp in, I can't remember what it was. In the 16th century, there was a siege in Antwerp, and in order to get more food in into Antwerp, you needed a kind of incentive for merchants to be willing to sell it. And because prices were controlled, nobody was willing to take those risks of trying to smuggle food into Antwerp, so they ran out of food. And that's the kind of quintessential story when it comes to price controls. When they're held below market rates, you get less in the way of quantity supplied.

Juliette Sellgren (21.44)

And this story, I think we're using examples. I mean, food is basically a necessity for survival, but we're using examples that seem almost mundane. I think people get up in arms more when you talk about things like health and healthcare provisions. Are there areas of life that we don't often think about that are really affected by this that I don't know people get annoyed about or honestly die from? Maybe that it's just barely visible that price controls are the reason why things are so expensive.

Ryan Bourne 

Well, let me…

Juliette Sellgren 

Or I guess not expensive, but hard to obtain, expensive in a different way.

Ryan Bourne (22.31)

Let me take a step back and talk about how prices help coordinate economic activity to actually make goods and services cheaper to people. So a few years ago there was a YouTuber, whose name I can't remember, but you can easily find this online, who tried creating a chicken sandwich, tried making a chicken sandwich from scratch. And when I mean from scratch, I don't mean he went to the supermarket and bought some chicken and bought some salad or whatever and put it together between a couple of slices of bread, he actually reared chickens. He went to the sea to collect water and extract sea salt. He grew wheat and separated the wheat from the chaff. Went through the whole process of doing that. He grew his own salad to be part of the sandwich. He didn't use his own tools. If he'd have used his own tools, it would've taken a lot longer and a lot more costly.

So he went through this whole process and it took him many months to actually make this sandwich and it cost him $1,500. And there's quite a funny part of the video where he tasted the sandwich for the first time and it tasted awful. Now, the moral of that story to me is that the way markets enable us to coordinate activity, to specialize in what we're good at and can efficiently undertake and then trade with others according to our comparative advantage, actually enables us to get goods and services much more cheaply than if we're in bracket self-sufficient, in self-sufficient. And what helps coordinate that? Well, it's actually the price market price mechanism. We don't need to know how a chicken sandwich is produced in order to buy a chicken sandwich. All we need is a free price mechanism to enable open trays between all of those different suppliers and ultimately us as consumers. So I'm trying to answer your question in the opposite way, really. You are trying to ask me if there are forms of price controls that have obviously destructive effects, but I think one clearer way of showing it is just that market trades using the price mechanism clearly enables us to produce goods more cheaply and brings goods to us more cheaply than they otherwise would be. Now there are certainly, yeah…

Juliette Sellgren 

That's brilliant. I can't believe it was so expensive to make a chicken sandwich, but at the same time, maybe it makes sense, actually. It definitely does make sense. I need to watch that video.

Ryan Bourne 

Yeah.

Juliette Sellgren (25.12)

You should watch it too. That's crazy. So, okay, so price controls and things like that, it's maybe the simpler concept in economics. It's you can watch a video and understand it even though it's under talked about, understood, misunderstood, is perhaps the right way to say that. Something that is way more complicated. I think that even I tell my students when I teach macro that it took me teaching macro three years after I initially really learned about it to understand how it worked, was inflation. Inflation is so complicated for something that affects so many people, literally everyone operating under a system and arguably in the US it affects everyone in the world because the US dollar and the United States is so influential. So what are some of the main misconceptions about inflation, and do you have any idea why it's so hard to grasp?

Ryan Bourne (26.25)

Yeah, that's a great question. So inflation just by definition is a kind of increase in the general price level, by which we mean all prices in the economy ultimately in the long run. So really the best way to understand it is reduction in the value of a dollar unit of a money unit, which in the United States is a dollar. And that, as I say over time, manifests itself in all prices increasing proportionately across the economy. Now in reality, we can't observe that directly. So we have to try and use price indices we call them, which are really weighted averages of different prices of goods and services that we spend money on across the economy, and we track them over time and we use that as a kind of proxy for inflation, which is the price level. And I think actually the fact that we have to do that leads to some of these confusions.

So one of the confusions is that people see an individual price going up and presume that that individual price is contributing or driving to inflation. And that's a misconception. An individual price can go up for two reasons. It can go up because of inflation, it could reflect inflation, but it can also go up because its price relative to the price of other goods and services is changing because of supply and demand factors in that market. So we see the total price and the total price change reflects that relative price change plus inflation. So it doesn't really make much sense to say that price change is driving inflation because actually inflation affects that price change. Now, what am I trying to get at here? Well, really what drives inflation, which is an increase in the price level, is the relationship between the amount of money in circulation being spent on goods and services and the amount of production taking place in the economy.

When the amount of money chasing goods and services goes up relative to production, the price level goes up. It might take a long time for all prices to rise, but the price level goes up over time. If the amount of goods and services being produced relative to the amount of money in circulation goes down, so the amount of production goes down relative to the amount of money in circulation, that can also push the price level up and lead to a temporary increase in inflation. So inflation is a macroeconomic phenomenon. It's driven by the overall scale of money in circulation relative to the production of goods and services. And individual prices are determined by supply and demand in those markets, but then can also be elevated or reduced by inflation. But people tend to conflate those two. So that's one big misconception. The second big misconception is that as a result of a similar confusion is that individual companies, individual landlords or whatever, can drive inflation by charging higher prices.

This is the basis of the reflation hypothesis for what drove the recent inflation. So the idea is a bunch of businesses capitalized on the fact that prices were going up due to energy cost increases in the Ukraine war and thought we're going to use this as a great opportunity to increase prices even more dramatically relative to our costs, and that will give us bigger profits and that will drive inflation, but that doesn't drive inflation. And you can think about this kind of logically, given what I've just spoken about, it doesn't drive inflation because ultimately consumers have to be willing and able to pay those higher prices, and you can only get a situation in which all businesses are kind of raising prices at the same time, or there's lots of businesses raising prices at the same time, if consumers have more money to pay those higher prices.

Otherwise, if I raise my price and all consumers keep buying my good, they're going to have less money left over to spend on other goods and services, which is going to push other prices down. So the only way you get an overall increase in the price level is if the amount of money in circulation actually increases relative to production. So at that stage, it's not greed, deflation driving inflation, it's more spending in the economy driven by more money, which is pushing certain prices up faster than others. And that can result in some firms making temporarily higher profits. So they're the two big misconceptions. The first individual price changes drive inflation when actually it's the inflation that drive that contribute to individual prices. And secondly, this idea that the actions of an individual business or even a whole sector or a range of sectors can just decide to make pricing decisions that increase inflation. The really important thing to understand is that inflation is a macroeconomic phenomenon, which ultimately comes back to the amount of money in circulation and the amount of goods and services being produced.

Juliette Sellgren (31.40)

I think what you just said and something that was really highlighted in your part of the book where you're talking about this, that really struck me, because I think economists were either really bad at talking about this and making this point clear, or we don't think it's necessary. But what's necessary to kind of nuance and strengthen the growth narrative that we talk about, the growth narrative that inspires so much optimism and hope in us, which leaves a lot of people feeling like, oh, well, greed, deflation and stuff like that. It makes sense that these ideas arise, these theories about how it works arise because we don't talk about when expansions are good and sustainable and honestly what's true growth versus something that's unsustainable and not, and I don't know if the way I'm saying it is even correct, because it took really a careful reading of some of the sentences that you wrote.

So for example, as time went on, it became obvious that overall spending or aggregate demand was running way ahead of its pre pandemic trend, which indicated that excess stimulus could explain a big component of the rise in the price level. That took me a minute. It's a good sentence, but even if you understand economics, I think it's hard to think about, okay, so you have this recession because of the pandemic, then you have the government that inflates injects money into the economy and it moves us past where we were before covid into an expansion, and expansion is the opposite of recession. So it sounds really good, right? That sounds great. People are buying things, the economy is dynamic, and usually those are things that we consider to be good for people. That sounds like growth, but what you said, and the way you talk about it indicates that this actually is not a good expansion. It's not sustainable and it's not stable. It's not the tide that lifts all boats, but it's a type of expansion which leads to inflation. So I don't know, does that make sense? Do you see that? And is there really a difference or am I just kind of reading into this in a way that is not quite correct?

Ryan Bourne (34.09)

No, you are correct. So in essence, what you are saying I think, is that you can have the traditional case for governments stimulating the economy, whether that be through monetary stimulus from the Federal Reserve or from fiscal stimulus from Congress, is that it can put more people back to work, it can increase production, it can increase essentially real output in the economy. But what we saw in the aftermath of the pandemic as a result of the potential growth in the economy being impaired by the pandemic and the Ukraine war and stuff at the same time as huge amounts of stimulus, is that the amount of total spending in the economy went up dramatically. So much so that real output didn't just return to something like we would expect was the potential of the economy to grow. But there was so much excess spending in the economy that a lot of that stimulus, a lot of that new stimulus just pushed up prices rather than leading to more people becoming employed or more actually goods and services being produced.

So let me talk about it slightly different way. So in the past four years, overall, consumer prices are now about 11% higher than we would've expected them to be. Had inflation [been] maintained at the Federal Reserve’s, 2% per year, average target, so about 11% higher right now, prices that you pay on everything from food to gas to everything else. Now what drove that? So some people say that was all a result of supply shocks, that was all as a result of the fact that the economy found it more difficult to produce goods and services coming out of the pandemic and then with the Ukraine war. So how would a supply shock manifest itself? Well, a supply shock would manifest itself in real GDP real growth being lower than we'd otherwise expect. And if you look at that, if you look at where real GDP is relative to, if it continued at its pre pandemic trend, you see indeed it's about 2% lower than it otherwise would be, so 2% lower GDP.

But remember, there's an 11% increase in prices. So what's driving those prices if we can't really explain it just through real GDP struggling? Well, if you look at total spending on goods and services, that's nominal GDP, that's actually 9% above now where we would expect if it had carried on in its pre pandemic trend. So it's gone really, really high relative to what we were expecting. So you look at these numbers, 11% increase in prices relative to what we might have expected in part driven by those supply shocks, which have meant real GDP is 2% below, but the vast majority of that excess inflation has actually been driven by too much spending in the economy, and ultimately that's the fault of Washington DC, whether you want to blame the Federal Reserve Congress for spending too much, borrowing too much or some combination of the two. Clearly macroeconomic policy has been too expansionary over that four year period as a whole, and that really explains why prices are so much higher now than they otherwise would be relative to the economy's ability to produce goods and services. Congress spent way, way too much, and the Federal Reserve created or oversaw too much money creation, which meant more money chasing goods and services, and that pushed prices up instead of leading to what you describe as those more positive expansions, which is when you get more employment and more production.

Juliette Sellgren (38.16)

Yeah, I think, I'm trying to think in terms of examples I can give my students because it's really, it's long run supply changes versus short run supply changes or demand. Now, I'm just getting confused trying to use the language of this graph, but the difference, really, it's money falling from the sky, basically, it has to get repaid at some point versus technological increases, right? If you introduce a new tool into the economy like ChatGPT, which people are worried about, yes, but it makes people more productive, which means that people have more time on their hands. And so this is becoming more clear, I think, as we're talking about it. So I hope that my listeners here see that as well.

Ryan Bourne (39.06)

So if you were thinking about a graph, essentially what, when you have excessive stimulus in the economy or when you have a stimulus, what you're seeing is an outward shift in the aggregate demand curve. So imagine a downward sloping aggregate demand curve that's shifting out. Now, why did we see such high inflation during this period? Well, to start with, the aggregate supply curve might be upward sloping, but at some stage in effect becomes vertical, right? So there's only so much that the economy can produce. There's only so many real resources that you can kind of call on to produce goods and services. So if you keep increasing stimulus so that aggregate demand curve keeps shifting out, and you are on the point of the aggregate supply curve, which is essentially vertical, then you get no increase in output, real output from increase in aggregate demand, all of that increase in aggregate demand just leads to higher prices. So that's the kind of way that I conceptualize it. Once you engage in excessive stimulus, really you are just pushing aggregate demand up at a time where supply can't respond. And if you do that, of course, if you're driving demand higher in any market where you don't see much supply response, we see this in a lot of housing markets around the world due to regulation. You just see prices go up, and in this case, the price level go up, which manifests itself in inflation.

Juliette Sellgren (40.31)

So how are we supposed to, I mean, the book has already been written. The book is awesome, listeners, you should check it out. And also we're doing this interview now talking about the very subject, right? So we are engaging in, I don't want to say pedaling because that sounds not such a good connotation, but in pushing and changing the narrative about what prices are for and how they work and clarifying actually the good that they serve. But what can we do to continue to me or listeners of the podcast or anyone, to continue to kind of push for this clarity, for this understanding of how it works? Because honestly, it takes a lot of economics, I think, to really see through this more emotional pull of, well, it's really expensive to live the cost of living. How are we supposed to do this? When really once you understand a bit of economics, you see through these misconceptions and you can understand the beauty of how it works. So how can we continue to do that and share that with other people?

Ryan Bourne (41.46)

I think the crucial thing is to take [Frederic] Bastiat's lesson of the importance of seeing the unseen. So just always hammer home the message that whenever anybody's talking about a causal story, whether that be greed, deflation, driving inflation or whatever, ask them to think, okay, if that were the case, then think through the chain of the money flows. In that sense. If one company starts charging more, what happens to the amount of money left over for those consumers of that good or service to spend on other goods and services? So what is the second order and third order effects of that individual company trying to use its market power to increase price? When you're thinking about rent controls or minimum wage increases, think about the ways in which a landlord or an employer could adjust to that price control. I think there's a temptation for people who are kind of untrained in economics to just think of the first order effect.

And yeah, if you control rents and you hold them below market rates, people who are able to maintain their tendencies will pay less than they would in a free market. So people see the benefits, the costs are always a second degree removed and are always a bit less clear. So if I were in your position in trying to impart economic wisdom through a podcast or through some other medium, I would just be trying to emphasize a bigger, broader point, which is really that a good economist or somebody that wants to understand public policy or wants to understand how the economy works should always think about the second and third order consequences and not just the immediate short-term effects. So that's the kind of key message that I think you should propagate.

Juliette Sellgren (43.40)

And what do you think is the most important takeaway? It might be that kind of, but what do you think the most important takeaway is from your book and from these ideas?

Ryan Bourne (43.51)

I think the most important takeaway is that the price mechanism is extremely important for coordinating economic activity, and we mess with it at our peril. So the second section of the book really goes into detail on the history and use of price controls, not just within the US, but historically too. And as I mentioned earlier, these things have been tried for 40 centuries now, and the most common manifestation is obviously price cap, where you're not allowed to raise a price above a particular level. And the overwhelming sweep of evidence shows that when you do that, you tend to result in shortages of the product that you are trying to control the price for declines in quality and the creation of black markets. We've seen that at every stage from ancient Egypt through to World War II, through to modern rent controls across in St. Paul, Minnesota.

There was a couple of years ago, they tried a rent control experiment, and it led to some of these effects almost instantaneously. So they have a record of failure incredibly blatant. Now, historically, you could perhaps make the argument that before modern states had the capacity to help people in difficult situations, in many ways controlling prices and trying to regulate prices through force is one of the only things they could do. But given this sweep of evidence and given the fact we do have modern states that do provide safety nets, there's no excuse really these days for reaching for such a crude, ineffective, and damaging policy tool. And it's really remarkable that given this sweep of evidence that they're still advocated the degree to which they are.

Juliette Sellgren (45.40)

Yeah. Thank you so much for putting together this book and coming to speak to us. I've learned so much, and I know my listeners will as well. I have one last question for you. What is one thing that you believed at one time in your life that you later changed your position on and why?

Ryan Bourne (45.58)

Well, I came out of university and I was a kind of squishy market leaning economist to yet to find libertarianism. And so I tended to believe that there was a really important and strong role for government in policing competition, and ensuring that market power was curbed and quite an extensive role for the government in preventing price collusion and all the other things that kind of dominate contemporary antitrust and competition law. My views on that have changed pretty dramatically as a result of both being closer to politics, but also because I think I recognize that there's actually an incredibly important margin of competition that that kind of static analysis of individual markets leaves aside. And that's kind of Schelling competition, Joseph Schumpeter's idea of creative destruction. So antitrust cases get so hung up on whether an individual firm has monopoly power in a very specific market and then looks at the price and output impacts of that, given the current state of that industry.

But what it negates is that over time, there are big incentives entrepreneurially to come in and completely revolutionize the way that things are done. People worried about Kodak having a monopoly in the film camera market, and then the digital camera came along, and then of course, iPhones came along, which completely revolutionized that market again, because everybody had a really effective high quality camera in their pockets at all times. Now, if you're an antitrust practitioner, you'd have got hung up on Kodak's market share and the impact on short-term prices. But that type of analysis really ignores that longer term incentive for entrepreneurial competition. So over time, I've become both much less worried about monopoly power within markets and much less supportive of extensive government efforts to try and police competition.

Juliette Sellgren 

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to The Great Antidote Podcast means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at great antidote@libertyfund.org. Thank you.