The Price is Right

0:00Two years ago, to sort of back up what Jeff was saying about money, some of you might remember the money game that we played with the students, where the older students sat in the chairs and got to choose the coins that they wanted, and then they passed the coins, the remaining coins, The Silver Coins back to the small children behind them and they took the phony money and gave the silver coins back to the younger children and it turns out that the younger children who didn't have the choice ended up with the most value and they got the prizes. And we were basically trying to point out the difference between honest money, which is gold and silver, and deceitful money, which is basically just paper and metal coins that have no market or intrinsic value.

0:53And then all of the things that result from that and the importance of having honest money in our economy. and then last year we played the property game and we were downstairs up on the stage and had a big jar of coins and we had we brought up nine students up onto the stage and I spread the coins all over the stage and let them go at it and what we saw was chaos and violence some minor injuries take place not too bad when I do this in college classes And then I brought the game to a halt and told them that I forgot to tell them the rules, and the rules were that you could only pick up coins within your little square, and that if you tried to pick up coins out of somebody else's square, you'd lose all your money.

1:51And then we played the game again and the result was that the students picked up the coins at a leisurely, non-violent, non-harmful sort of way. And this game was used to show the difference between a society where it's a free-for-all and a society where there's property rights which everybody recognizes and which are enforced. And so you see the difference between a chaotic society where it's a free-for-all and one where resources are conserved and used peacefully where you have property rights. And those two games, first, honest money, and the second, private property rights, are foundations of society.

2:42Without those things, society slowly but inevitably breaks down, becoming more chaotic, less prosperous. And today we're going to build on those two games. And to look at the price system, which can result when you have honest money and private property, and the private property where people can trade their goods and their property for honest money and the mechanism that is used is the price system. And so on your schedule you see the title of my talk is The Price is Right That's what we're going to play the price is right game.

3:32I couldn't resist. Now this is a quiz. You're only going to get about a minute to fill this out and you're just going to supposed This is supposed to put the price that you associate with each of these goods. Now you may not know, but you can always guess. So I want you to put down the price of a gallon of milk, the price of a plain t-shirt or white undershirt, then the price of a sheet of plywood.

4:32This plywood is about 8 feet long and about 4 feet wide. It's about that thick. And it's used to build houses. And then there's a gallon of gasoline. And the tiebreaker today is going to be an ounce of gold, the price of an ounce of gold. okay time is time is running out

5:08it doesn't look like you're going to be the winner anyways so

5:19okay okay let's see ah Hannah Kate has been paying attention to the markets Jennifer is two. Oh, well, you did well on the price of gold. Scott, yeah. Yeah, very good. It turns out everyone got a perfect score.

6:19and so everyone's going to take home some take home some of the prize package and I'll explain that after we're done but I just want to talk about prices and the price of right that the price is right game now in the price of right the price is right they want you to try to guess the price that they have purchased the products for for the Day of the Show. But in reality, the most important thing we need to know about prices is that they change all the time. That the price of milk changes all the time. That the price of gasoline changes all the time.

7:04Even t-shirts and plywood changes all the time. And of course, the price of gold changes all the time. That's a very important feature in the price system itself. That's really the quintessential feature is that prices change and that's one thing that Henry Hazlitt points out in Economics in One Lesson is that we have to understand that prices change and that's the job that they do. They change to reflect underlying resources in the economy and underlying desire or demand for the various basic products, goods and services in the economy.

7:50So that's really the global lesson in terms of the economics of one lesson as portrayed by Henry Hazlitt and many of the other Austrians. So all prices can be valid, they can be possible and indeed do and have existed. Just a side point on relating money and inflation to the prices of goods. In Zimbabwe, which is in Africa, it's something you can go look up In the United States, if I gave each of us a million Zimbabwe dollars, each one of us a million Zimbabwe dollars, we wouldn't have enough money to buy lunch today.

8:50Okay, so we have to realize that the price system simply reflects reality. It reflects the goods that we want, that we desire, that we wish to consume, and the resources in the economy, and of course the adverse role that inflation can play. So it tells us about scarcity in society, and it does so completely on a voluntary basis. There's no coercion, and as a result, the prices that emerge on the market, even though we don't like them necessarily, are one that tends to bring about harmony between each and every one of us.

9:38Now we may be envious of the prices that some people are getting you know if you see somebody who owns an oil well you may be envious of the fact that the price of oil is so high and they're making so much money and you may be angry at certain prices if you go to the store and you find that your favorite steak is now 16 dollars a pound when it used to be eight dollars It may make you angry, but it's simply a reflection of reality. And envy and anger and a lot of the other issues with the price system are brought about or were brought face to face with them in emergency situations.

10:29Emergencies like hurricanes that we've seen over the last several years, or droughts or war, these sorts of emergency situations bring the idea that prices adjust to reality right into your face, right into your pocketbook. And so when we look at an emergency situation like a hurricane and we see what happens and things like milk, things like water, things like gasoline and plywood, ice, all of those things go up tremendously in price. The price of hotel rooms just outside of the affected area will tend to skyrocket.

11:16And so what government response to this is typically that they're going to control the price of these things. That they're going to force gas stations, stores, lumber yards, hotels to keep their prices constant. not change their prices, even though reality, as we know it, has changed dramatically. And again, this is something that may make you angry if you were to walk into the store and your favorite beverage had just increased by 300%. You're going to be disappointed. You may be angry. But those prices are a reflection of reality.

12:03And so what happens when the government tries to control prices? Well, say for example that a hurricane is coming to your hometown and you're preparing to leave in order to seek a safer place, to seek shelter. And you get in your car, you get your family in the car, and you take off in the opposite direction of the hurricane, but you need some gasoline in order to get far enough away, so you pull into the gas station and the government says either prices are free to adjust in a free market economy or they're not free to adjust because the government is controlling them.

12:59Well, if you pull into a gas station with hurricane conditions and the price is controlled, you're going to pay the normal price. And so what your normal reaction would be is to fill up the tank. But what happens if it's not just you? You're not the only smart person in your town, but everybody's smart, everybody wants to get out of the way of this hurricane. And so everybody's leaving town and everybody's gassing up. Well, if the price is the same and everybody is filling up their tank, the gas stations are going to run out of gas. And some of those people who are trying to get out of town are going to be stuck.

13:46They're going to be stuck somewhere along the way without any gasoline. And this actually happens. People who are fleeing a hurricane area, many of them incapacitated, have health problems, need oxygen, and they get stuck out on the interstate or at a gas station that's run out of gasoline because the price remains the same. Now what happens if that dastardly gas station owner decides that this is a great opportunity to make some money? Gas stations typically only make a couple of pennies per gallon of the gasoline that they're selling. They make more money off of the Coca Colas and sodas and potato chips.

14:32They make very little money off of gasoline, but if it's a hurricane and everybody's desperate for gasoline and all the gas stations are running low, instead of charging $3 a gallon, why not charge $10 a gallon? Then you can finally make some money. Well, if the gas station is charging $10 a gallon for gasoline, chances are you're going to think twice about how much gasoline you're going to put into your car. You're not going to necessarily fill it up all the way because you don't need a full tank to get to Atlanta or Nashville or whatever. And so that price mechanism, by being a reflection of reality and trying to allocate resources in the emergency situation actually means that more gasoline is going to be available to more of those people fleeing the hurricane area.

15:49The next morning the crisis is covered up and we've got everything run out of gas, it was a disaster, it was going to happen. What actually was the bad news back then in a few days? There's a law in Alabama that says you cannot make the price higher by more than 25% per day. And it's because of this law that all the gas stations are running out of gas. Yeah, it is a law in most states that the government is controlling the gas. and they also control hotel rooms. And you can imagine the same sort of thing goes on there. If you show up at a hotel outside of the hurricane threatened area and it's $49 a night, well, you've got your spouse and you've got several kids, maybe a couple of dogs, why not rent two rooms instead of just one?

16:44But if you show up and instead of $69, It's $189. Guess what? Everybody's going to camp in that same room. So it means that more families are going to have access to hotel rooms under those conditions. And this is true for water. This is true for plywood. This is true for ice. And guess what? If you allow the prices to skyrocket during emergency, what's going to happen? Well, people are going to have an incentive to bring resources, to bring chainsaws, to bring ice, to bring all of that material because they can make so much more money. You know, if I deliver gasoline for a living and I can only get the same amount of money if I drive a gasoline truck into a hurricane zone, I'll think twice about doing that and just stay home and wait for, you know, everything to blow over.

17:41But if I can make an extra $5 a gallon on 10,000 gallons, guess what? Thornton is going into that hurricane zone with a truckload of gasoline. So the price system works well not just during regular times, not just in inflationary times, but in all times, including and most especially during emergency times. And so while people can be envious and people can be angry as a response to skyrocketing prices, we have to remember that there's a reason for it. and that that reason can end up saving lives and then that's important and I think this is also related a little bit to the financial crisis because what's been happening slowly but surely until the last week or so is that firms have been adjusting their behavior to these new conditions they're trying to find They've been trying the prices to these financial assets that are related to the housing bubble, they've been trying to adjust their books, they've been trying to get new credit, they've been trying to get bankruptcy protection, they've been trying to sell off assets and so forth.

19:07And then when the government comes in and says, no, we're just going to bail people out. We're not going to force you to try to find the real prices to these assets. We're just going to have the government buy it all up. And so the market has been working with respect to this financial crisis. The first thing it did is it forced all of those subprime mortgage lenders out of business. This was in a couple of years ago, okay, so the market was on top of this issue before it ever made the headlines. It was already driving bad companies out of business, and it's been working, but now that we have this bailout in place, that puts a stop on the whole thing, which means the problem is not going to be resolved in an effective, efficient manner.

20:01It's going to be one that festers a lot longer, and as Mr. Tucker said, is going to be a much greater burden to the American taxpayer, many of whom were not responsible, were not involved, didn't make any money off the housing bubble, didn't take out a risky loan, didn't buy too much of a house, and so forth, and so it's the wrong thing to do ethically, But it's also the wrong thing to do economically. So, the price system works, the price system is right. Thank you very much.