Thoughts on Reisman's Economics Lectures

[JustinCEO]

Micro Lecture 6B:

Suppose for example, the government is concerned that poor families can’t afford enough milk for their children and decides to make milk more affordable by imposing a price control. Well, this can simply deprive milk of its profitability and undercut its production. So suppose the government goes further and they not only control the retail price of milk, they control the price at the wholesale level and the control the price at the farm level. Even if they’ve done that much, what happens if they’ve left uncontrolled the price of cheese ice cream, butter and other milk products? How will the supply of milk be used? More for the other products. So they’d be cutting the supply of Milk that way, they’d be prohibiting milk from being competitive with other products of the same basic material.

And that is the story, I think, in large measure with conversions of apartment buildings, from rental units to collapse and condominiums. A given apartment building has these three different uses: it can be rental units, it can be co ops or it can be condominiums. Now, if you impose rent controls, and you don’t impose controls on the price of co ops and condominiums, then which way will the available supply of apartments be used?

I liked this connection.

A related point is government imposing price controls on more affordable housing but not luxury housing, and then complaining when developers only want to build luxury housing that they can charge a market rate for. Of course the developers are going to target their production of new units at the stuff that’s not under a price control regime. So the lots of land purchased and the cranes and materials and construction workers will all be working on housing for the rich instead of housing for the masses due to govt policy. But then govt officials turn around and say that the govt needs to build/subsidize affordable housing because, left to its own devices, the market will only build luxury housing (just like how the market only builds luxury cars and only sells high end expensive restaurant meals, right??)

In some places, the govt makes developers assign a segment of the luxury rental housing that govt policy incentivizes the creation of as set-asides for poorer folks at an “affordable” (not really affordable) rate. I think these set-asides are baked into the approval process for new developments, so the developers don’t really have a choice. The housing units themselves are handed out in a “lottery” process to income-qualified renters.

An analogy: imagine if govt screwed up the market for automobiles really badly by imposing price controls on affordable cars and so the new cars being produced were mostly super high end luxury cars. And then imagine if, as a condition of being able to sell their cars in the marketplace, govt made luxury automakers sell some high end luxury cars to poorer folks at 50% off (so, way cheaper than retail, but still expensive for the poor folks). This is kind of like what the govt in some places does with rental housing.

So the developers essentially eat the cost of the luxury housing set-asides as a kind of tax (which raises the cost of rental housing), and a few lucky people get cheaper-than-distorted-market-but-still-expensive-housing, and urban areas remain in a never-ending “housing crisis” that never gets fixed.

[Lebowski]

This middle-of-the-road stuff is both widely accepted and widely manipulated. One leader in the Libertarian Party used to say something to the effect of “if you’re not uncomfortable with your own position, then it’s not extreme enough.” His explanation was that in the political process if you have side A and B they’re going to end up compromising somewhere in the middle. So if what you want is actually B, then you should publicly adopt position B+ (a more extreme version of B) and advocate for B+ loudly so that the political result is B or something closer to B than if you’d advocated for B in the first place. If you want minarchy, then advocate for anarchy - that sort of thing. According to him, people advocating for the middle of the road in politics are wasting their time, cuz it’s going to end up there anyway and they’re not actually exerting any meaningful influence over the outcome. As far as it goes, I still think that last statement is approximately correct.
What I didn’t notice until later (after FI) was the LP leader was a middle-of-the-roader himself. He never advocated political decisions ending up anywhere other than the middle. He just advocated a cynical strategy of moving the middle in the direction you want by pretending to be more extreme than you actually are.
Whether you’re the naive middle-of-the-road advocate or the savvy “pretend extremist” middle-of-the-road compromiser, this sort of linear regression model of politics completely ignores that there’s an objective right answer, and things like truth seeking and mind changing in an honest attempt to find it.

[JustinCEO]

@Lebowski

. One leader in the Libertarian Party used to say something to the effect of “if you’re not uncomfortable with your own position, then it’s not extreme enough.” His explanation was that in the political process if you have side A and B they’re going to end up compromising somewhere in the middle. So if what you want is actually B, then you should publicly adopt position B+ (a more extreme version of B) and advocate for B+ loudly so that the political result is B or something closer to B than if you’d advocated for B in the first place. If you want minarchy, then advocate for anarchy - that sort of thing.

One flaw with that strategy is that if you’re too outside the mainstream then people will just dismiss you as some fringe guy even if you manage to somehow get a bit of political power.

A bigger flaw is that your position should be based on sound explanations. So if you take on a view as just a negotiating posture instead of something based on sound reasoning, then you might not actually be able to argue for it. In that situation, it’s actually reasonable for other people to not want to try it, because you don’t have actual arguments for your view.

[JustinCEO]

@JustinCEO

Reisman’s analogy was that bad economic policies made due to ignorance are kind of like pressing buttons in a factory when you don’t know what you’re doing or how stuff works.

Re: how dangerous factories can be, consider these tweets:

[JustinCEO]

In Micro Lecture 10A Reisman talks about so-called barriers to entry that people think prevent competition. One is high capital requirements. Reisman gives the example of entering the car industry. Suppose it would take $1 billion to reasonably enter the car industry and be competitive. Why couldn’t you do it with, say, $100 million? Because you’d only be able to build smaller numbers of cars and thus have higher unit costs and thus lower economies of scale and thus be less competitive. What’s created this situation? The existing companies trying to compete each other by investing their capital and trying to efficiently make large numbers of cars. So competition is what’s created the situation of needing large amounts of capital, so the requirement of having a large amount of capital can’t be something preventing competition.

[JustinCEO]

Reisman talks about his concept of monopoly in the lectures. He defines a monopoly as:

“Monopoly is a market or part of a market reserved to the exclusive possession of one or more sellers by means of the initiation of physical force.”

I was thinking of how monopolies can spill over from one area into other areas. Like Elliot talks about the issue with banking being very heavily regulated and how that causes problems for competitors to mainstream social media companies. The regulations on the banking and financial sector are so onerous that I think that sector would easily meet Reisman’s definition of monopoly. It certainly isn’t a free market. And it seems like if a company with an actual monopoly in an important sector is willing to throw its weight around, it can cause a spillover of its monopoly into other areas.

[JustinCEO]

In Micro Lecture 10B, Reisman criticizes the idea that a big firm can throw a ton of resources at running a competitor out of business so they can jack up the price.

His argument is basically as follows:

There’s some specific amount of value per year that you could gain by running a competitor out of business. Even if you assume that once you drive the competitor out then you can capture that value indefinitely, the value to be captured will only have a limited value in the present moment. (He gives an example of 100k of value per year being worth investing $1 million in capital). The limited present value of the future stream of revenue to be derived from driving the competitor out of the marketplace is what it actually makes economic sense to invest to try to drive the competitor out.

(I think the idea here is: given the going rate of return, sinking capital greater than is justified by the future revenue stream is a bad financial decision, since you could have allocated the capital elsewhere and gotten a higher return).

So the result is that even if BigCorp has a gazillion dollars, the only part of that gazillion dollars of capital that MomPopShop is gonna have to face is a very limited amount that’s justified based on the revenue stream to be captured from driving MomPopShop out of biz. So if MomPopShop gets driven out of biz, it’s not from BigCorp throwing their weight/capital around, but from other factors (like BigCorp being more efficient, pleasing the consumers more etc)

[Elliot]

I think some people would reply something like: “MomPopShop can only do 100k/yr revenue, but if they drive it out of business (and the others) then they have a monopoly and can abuse it by raising prices, and charging e.g. 1mil/yr for the same goods. So it’s worth a lot more to BigCorp than to MomPopShop (which may help explain why big companies often buy a bunch of small companies). And BigCorp can also raise prices on all their goods if they get rid of all their competitors, so their current 100bil/yr revenue could become a trillion from destroying competitors.”

Your rebuttal?

[JustinCEO]

1. BigCorp has to worry not only about current competitors, but potential competitors. Potential competitors can be financed by the capital market of investors seeking the highest rate of return on their capital. If a firm like BigCorp raises their prices, it increases the profits that can be had by potential competitors who could enter the market and then undercut the newly raised prices. BigCorp (or, IRL, Walmart and Amazon) might be big fish in their spheres, but they’re tiny fish compared to like, all the investment capital in the world that could be invested in their business lines if they tried the strategy of raising prices on a sustained basis. The bigger BigCorp is, and the more they try to jack up their prices, the more potential capital they could be facing if they try to jack up prices after running their competitors out of business, since there is more capital that could be profitably in a line of business that is very large and has high prices relative to costs. The best way to keep that capital on the sidelines is to run competitors out of business by the means of being more efficient and doing things well. It’s hard to be really really excellent at a particular business in a million little ways that are hard to copy. If you do that, then new competitors can’t just come in financed by a bunch of investment capital and pick up your business.
2. Even a monopoly provider can’t do unlimited price increases. The prices aren’t as low as they would be in a more competitive situation, but the monopoly provider doesn’t want to price consumers out of the market for their product. That would not actually be profit-maximizing. Like even if there was one gasoline provider, I don’t think they’d charge $1000/gallon cuz that’d price a bunch of their customers out and then they’d have a bunch of gas sitting around that they value less than the money from the consumers that they could get if they charged less.
3. And also, to the extent the price is high in a monopoly situation, that incentivizes other producers to figure out alternatives that they can bring to the marketplace, and it incentivizes consumers to figure out viable substitute goods. So it’s a similar issue as in point 1, cuz the monopoly provider has to worry not only about current competitors but potential competitors backed by all the investment capital in the world that it makes sense to invest in the monopoly provider’s line of business to get a piece of the profits there.

[JustinCEO]

Reisman, Micro Lecture 11A (automated transcript)

let’s say you’re doing 80 90% of the business. To get that remaining 10%, you have to slash on your vastly greater volume, then you have to incur a multiple loss for a long time. And then it’s very, very doubtful that you’ll ever be able to succeed in getting a premium price. If you leave the small competitor alone, you’re in a position to make handsome profits, on your huge share by charging a price. If you can have you if you can have low costs, if you can get your costs down, that’ll be the key thing, get your costs down, be profitable at a price where your small competitor is just getting by, you don’t have to put him out of business, you just want to be sure that he’s not going to grow rich, and be able to become much more efficient than he’d be a serious threat. But if you have some other firms that are doing 10 or 20% of the business, they’re not exceptionally profitable, they’re more or less just getting by but you’re profitable, because you have low costs. Well, that’s the formula for success. You’re not waving a red flag, inviting other people in to cash in on a high price, or your price is low, you have good profits because your costs are lower still. And so the point is, they doesn’t pay the Giants to go after the last few percent.

I thought of Apple when listening to this. Apple is extremely profitable. Lots of their products have high profit margins. It is within their economic means to charge less for their products (like iPhones) and I think they’d get some more market share if they did that. They might succeed in running various competitors out of business. Why don’t they? Is Apple just bad at business? Do they not like money? Are they economically unsophisticated? I think the answer to those questions is no.

I think what’s going on is that Apple currently has happy customers who are willing to pay a premium. Other companies have customers who are willing to pay less, don’t particularly like Apple, prefer certain features Apple products don’t have, whatever. If Apple wants to make a play for the other companies’ customers, Apple can’t price discriminate and charge the less profitable customers less while continuing to charge its current, more profitable customers more.^[1] It has to lower the price for everybody. If it does that, it’s going to reduce its profit margins on its current customers. And it may not make up for those reduced margins in the increased volume of sales. So Apple doesn’t actually have a profit incentive to run the competitors out of business. It’s better off getting premium profits on its current, large, willing-to-pay-a-premium customer base than getting reduced profits on an even larger but less-willing-to-pay-a-premium customer base.

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1. It can do something sort of similar by having lower-end phones that are positioned as value-oriented products. These lower-end phones can be targeted at the people who are not big Apple fans and who are thus unwilling to pay a premium price. But even with such an approach, Apple still has to charge the same price of the lower-end phone to everyone, and if the lower end phone is a good enough product, it may wind up cannibalizing some higher-end sales and thus reducing profits accordingly. ↩︎

[JustinCEO]

In the first Macro (01A) lecture there’s some discussion of broken window fallacy with students. It was kind of hard to hear but one guy seemed to think that because the total spending wound up being the same whether the baker had to pay a glazier to replace his window or whether he got to buy a new suit from a tailor, that things wound up being in a “balance” either way and so maybe we should be indifferent between the two scenarios. He seemed to not understand that both the baker and the world were worse off in reality in terms of the amount of wealth that was in existence. Reisman explained this clearly - that in one scenario you just have the window restored, whereas in the other scenario you have both the window and a suit. This seems really concrete and clear to me but the student seemed to be having trouble with it. I think these are MBA students btw.

[JustinCEO]

In the Macro 2A lecture, Reisman lays out his explanation of the detailed mechanics of how the govt manipulates the money supply. What follows is my understanding of Reisman’s explanation, and any errors are my own.

Context: there is a Federal Funds Rate, which is the interest rate at which banks lend each other money.

If the Federal Reserve wants to increase the money supply, it buys US Treasuries in the market. (This is the step that’s often referred to as printing money, even though these days it’s largely electronic.) Reisman says that the Federal Reserve might write a check to some dealer of US Treasuries, and get US Treasuries from the dealer in exchange. (I read a slightly different account online that said the Fed credits accounts of people who bank at the Federal Reserve, but the operation is basically the same). It’s this check-writing (or crediting of an account) that is the inflationary act, since the Fed isn’t limited by some constraint on the funds it can spend in buying Treasury Securities - it can create the money “out of thin air”. So that’s the printing money part. And then the money actually makes its way into the economy when the check is deposited, lowering interest rates and making more funds available for lending, which causes inflation. So yeah this seems awful.

Reisman says that Milton Friedman advocated for years that there be some sort of rule by which the govt limit its increases in the money supply as opposed to leaving it up to the whim of govt officials. Shockingly, the govt officials preferred whim!

In the same lecture, Reisman says that the traditional understanding of the Constitution until the Civil War was that it permitted Congress to make actual precious metal money from gold and silver but not to make paper money.

[JustinCEO]

Macro Lecture 5B - Reisman says that he got some kinda negative pressure from the school he was teaching at (Pepperdine) due to the unpopularity of his views, that him having written Capitalism didn’t count for very much in his favor, and that he got (student?) evaluations that put him at the bottom of professors at his school (and in response to a student question he clarifies that he doesn’t mean bottom professor at his department but at his whole school).

[JustinCEO]

Macro Lecture 13B -

Reisman says that overthrowing the gold standard and letting the govt print money has greatly expanded size of govt. No need to have balanced budgets or worry about the cost of programs too much. Then when prices rise people blame the mean capitalists.

He also thinks no gold standard means you get more frequent/longer wars. If you had to pay for the war with taxes in a clear way, people would be very reluctant. But with govt printing cash it’s np.

(I think that key context for these last two points is that the public doesn’t understand what creates inflation or how it works.)

Reisman thinks that the quantity theory of money is important knowledge that the govt officials who handle things like printing money may not have. And also even if they had the knowledge, they’d need to have integrity. So basically…

So what does this mean about what the future buying power of people’s life savings have come to depend on? It depends in the last analysis on the knowledge, the state of knowledge and integrity of government officials. That’s what the future buying power of your life savings have come to depend on. Now, I think that’s hugely risky investment.

Reisman says that because of the current situation (with inflation, no gold standard), the stuff that would normally be safe investments like bonds and savings deposits have become the least safe, and people have to go into the stock market and may not know what they are doing.