Marian Tupy: Hello, and welcome to this episode of Human Progress podcast. Today I’m joined by Dr. Brian C. Albrecht, chief economist at the International Center for Law & Economics and author of the Economic Forces newsletter. Brian writes about competition, regulation, antitrust, inflation, and the limits of government’s control. He explains how markets work, why prices matter, and why good intentions often produce bad policy.
Marian Tupy: Brian got his BA in physics, of all things, so he must be really smart, and political science from St. Olaf College in 2012, his MSc in economics and public policy from Barcelona Graduate School of Economics in 2014, his MA in economics from University of Minnesota in 2017, and his PhD in economics from also University of Minnesota in 2020. His work matters because human progress depends not only on innovation, but also on the institutions and incentives that let useful ideas spread, compete, and improve ordinary lives. Brian, welcome.
Brian Albrecht: Hey, thanks for having me. I’m excited for this conversation.
Marian Tupy: Thanks so much. What we are trying to do is to alert our readers really to the economic underpinnings as well as political, but especially the economic underpinnings of modernity. Why the last 200 years are so fundamentally different from the previous 300,000 years that Homo sapiens has been on the planet. And so I’m always very intrigued to talk to economists and get to hear from them whatever angles they have on the economy. But online, you are of course described as one of the chief promoters of price theory or defenders of price theory. So maybe we can start there and maybe you can tell us why this rather amorphous idea of price theory, why does it matter for great enrichment, for human progress in general?
Brian Albrecht: Yeah. So overall price theory, it starts with the same thing that economics starts with, which is scarcity, and is trying to be a rigorous, systematic way to think through scarcity. Scarcity immediately implies tradeoffs. Tradeoffs come with costs and benefits. Thinking through that, and that’s a like core thing to price theory, but it’s also kind of broader, day one, econ 101 type of stuff.
Brian Albrecht: I think the thing that makes price theory unique, or at least the way that I want to push it as a unique lens, is really lean into that prices. I mean, you talked about the last 200 years being different than the 300,000 years before that. I mean, one of the big differences that makes the modern world unique is we can draw that line at different spots, but markets are a huge thing in our lives today. Markets allow us to coordinate across time and place in a way that we couldn’t have imagined 300 years ago and even the most sophisticated societies, say, 2,000 years ago, nowhere near what we can have today.
Brian Albrecht: So price theory is really about studying prices, what causes them to move, how they coordinate behavior, when do policies affect them in a productive way, when do policies affect them in a destructive way, and trying to take that rigorous thinking that all of economics tries to apply to scarcity tradeoffs and really think through markets, how they’re connected and the study of that. It’s kind of ironic because a lot of price theory isn’t necessarily true markets, but we know a lot of stuff about how markets work and then we say, “Okay, voting is kind of like a market,” so we’ll try to use some of the tools from price theory, what are the costs, what are the benefits to think that through.
Brian Albrecht: So it’s a little bit amorphous, absolutely. It’s not just as the boundary between economics and political science or the boundary between sociology and anthropology, these are moving all the time. But I think rigorous thinking about prices is what makes the theory and the prices come together as price theory.
Marian Tupy: Okay. And so perhaps you can talk about the following three. One is prices as signaling mechanism. And then maybe draw out the distinction between prices as emerging spontaneously under perfect free market conditions as opposed to what our politicians often do, which is to try to set prices because it feels good.
Brian Albrecht: Yeah. So I take this line from Alex Tabarrok that a price is a signal wrapped in an incentive. There’s two aspects to what prices do. It’s a signal about what’s happening. Hayek used the example of tin. All that users of tin need to know, they don’t need to know where a shortage came from or if there’s a new usage for tin, they see the price of tin go up. And that little thing, that the price was a dollar before and now it’s a dollar fifty, it seems simple, but it allows for this coordination, again, as I said, across time and place.
Brian Albrecht: Deciding, “Okay, am I going to hold off on my tin production until tomorrow? Am I going to do something else with my factory because tin is more expensive?” That coordinating of behavior comes from the fact that it’s this simple way to send a signal. As an analogy, there’s all these ways of, especially in the world of AI and LLMs, we’re trying to figure out how can you compress information that we can optimally figure out what the next word is or things like that. What boils things down to the simplest building block? Prices do a lot of that.
Brian Albrecht: They’re not the only thing in the world, they’re not the only thing that matters, but they’ve proven incredible at signaling where’s there scarcity, where is there abundance. In my life right now, there’s an abundance of water. I don’t really need to worry about the price when I open up the tap, but that’s not true always. So the low price conveys that, but on a more granular marginal level, as economists, on the margin, prices are able to coordinate that.
Brian Albrecht: Now, economists try, and not just economists, thinkers try to distinguish between market prices or free market prices from others. For example, what exactly does the price of my electricity bill convey? It’s not set by the same sort of forces as when I go to the grocery store where we have a bunch of competitors, Krogers and Albertsons and Walmart and Costco bidding for the chicken from the wholesaler and so on and so forth. It’s a different world, but from my perspective, it’s still a price. I still decide how much energy to use, but it’s a little bit different.
Brian Albrecht: And so there’s gradation there. There’s gradation across when you have more or fewer markets. And on the other extreme example would be like not allowing prices at all or just completely government-set edict, like, “Oh, prices are going to be this and you’re going to get a ration of that,” and you make those decisions. Different countries across different time and place have had different systems for dealing with that. But I think one of the, we’ve talked about the signal aspect, but there’s also the incentive aspect. When it’s a government-set price, what is, where do you get punished if you set it too low or too high? What is that feedback mechanism? What is that incentive?
Brian Albrecht: So for example, if you’re a grocery store and you set the price of your bananas… I got three little kids, they eat so many bananas, it’s crazy. That’s why it’s always in my head. You set the price of bananas too low, all of a sudden you’re sold out way before you’re ready to. You get a feedback. You’ve left money on the table that you could have otherwise made. And that is a signal for, “Hey, maybe tomorrow don’t do that. Maybe raise the prices.” But by government edict, the manager, the Politburo chief, is not making that money. So what incentive do they have to set prices in a way that conveys that information that you get in a free market price?
Brian Albrecht: Again, these free market versus government-set are kind of like ideal types. Ideal not in the sense of normative, they’re good, but we can imagine a perfectly free market, we can imagine full government, and a lot of things are in between, but we can at least conceptually separate those.
Marian Tupy: I think that’s a very important element that you brought into this discussion is that it’s not just free market prices, like the price of groceries, because that’s largely deregulated, which give us a signal, but also a government-regulated price, like the price of electricity, which has all sorts of taxes added on top of it and green levies and whatever. That also delivers a certain signal and people will adjust. But at some point, you may get to a situation like we did in Eastern Europe, because I grew up under communism, where the prices are so completely divorced from reality that the whole system actually collapses on itself.
Brian Albrecht: Yeah, that’s a very extreme example. You have less extreme examples of just having extreme shortages. So like in Mamdani in New York, he’s known for wanting to have these government-led grocery stores, but those have been tried in other places. It’s not that… I forget if it’s Kansas City. Let’s say it was Kansas City. It’s not like Kansas City’s system collapsed. It’s like, no, but there’s just shortages in these buildings, in these grocery stores. And so, again, gradation between there.
Marian Tupy: So in public debates, politicians often ignore scarcity and tradeoffs and waste and things like that. Why does that happen? Why is it so difficult for people to accept that there are scarcities and tradeoffs?
Brian Albrecht: Yeah, I mean, people, I would say people do accept it in the situations where they face that feedback themselves. So anytime you go to the grocery store, keep coming back to that as a simple example, you’re confronted with scarcity. There’s just no way around it. Maybe not today. I could go to the grocery store today and buy as much stuff as I’d want and it wouldn’t really affect me. But if I did that day after day after day, eventually I’m going to hit a point in which I don’t have resources for that.
Brian Albrecht: So we all kind of want to ignore it, and in some sense we do ignore it at time and place, but we get feedback. And I think that’s the crucial thing. When you’re in the market, you get that, it’s not just the signal, but also the incentive to economize where you should in your own preferences. You need to take this seriously. You don’t have enough money. You need to make these tradeoffs. In other parts of life, not just government, we’ll come to government in a second, that feedback isn’t quite as tight. If you’re in a large organization, you make some budgeting decisions that really don’t affect you. You don’t take them that seriously. If you spend a little bit extra on the company card when you go out to dinner and things like that, there’s how tight is that feedback is an important thing for you.
Brian Albrecht: And then at the far extreme, you start getting into a government with even more insulation from that because you don’t have shareholders and type of stuff. You have different types of feedback. I mean, local communities might have tighter feedback because you’re more responsive to the voters. Totalitarian regimes would be the furthest because again, you don’t have any feedback. Or the type of feedback you get on your budgeting is just very different than even your local city planning.
Marian Tupy: Right. And when it comes to government spending, Milton Friedman had these four ways of spending money, and the worst possible way is spending somebody else’s money on somebody else. You don’t really care about that sort of thing. But what’s so interesting is that people who should know better. When you look at, for example, Mamdani’s proposals, et cetera, a lot of smart people will back him and his economic policies. And is it just pure political demagoguery and letting the principles out of the window?
Brian Albrecht: I won’t claim to be an expert on New York politics and what drives people one way or the other. I mean, there’s that, but there’s also in political venues and arenas, you have tradeoffs in a different way. It’s different than when I go to the market, but you still have tradeoffs. You’re trying to make compromises. Just as I make compromises, maybe this week I’ll get the good steak, but I’ll get the cheap bread or vice versa, in politics, it’s a different sort of tradeoff, but you’re trying to make compromises.
Brian Albrecht: So it’s, I don’t have a good framing for people in general. On this particular topic, I don’t have a good frame, but I think one thing is, again, circling back to feedback. If I get excited about… Even I’m… You know, I’m an academic, I’m a very rigorous type, that’s kind of how I imagine myself, and then I get really worked up, I get excited about some political person for all the reasons that every normal person who’s not an academic gets excited about them. What’s the feedback mechanism that I receive when I kind of get overly excited?
Brian Albrecht: For some people, it’s you get publicly shamed for it because you get called out for your inconsistencies. But for most people, being excited about the local politician or the national politician, it’s more like tribal excitement. You have friends that are along those lines, than any sort of kind of rational… It’s rational, but it’s not, again, the immediate feedback you’d get in your decision-making. So I think there’s a lot going on. I’ll let you go.
Marian Tupy: I like that. No, I like how you introduce tradeoffs also to political decision-making. In other words, that you may end up with a completely suboptimal policy, such as government-run grocery stores, because Mamdani will create a coalition of people, some of whom care more about maybe, I don’t know, police reform. And in return for getting police reform, they are going to give him leeway on government grocery stores and so on.
Brian Albrecht: And the other, just one more on that, the classic trap of government policies is the concentrated benefits, dispersed costs. There’s a group that are really excited about these grocery stores for a variety of reasons. One maybe ideological, it fits the way that they want to see the market work. The other generally maybe think that this will be better for them in some time period, so they’re excited, they see it as a handout to themselves. But for most people, it’s just not number one priority. And so by being a savvy politician, to be honest, you kind of find ways to, okay, how can we get certain people excited about it that can focus on all the benefits of what I’m doing and kind of, let’s kind of ignore the cost of it in a different way. In the same way that, or in a similar way to, you know, if you’re trying to sell people on anything, you want to hype up the benefits and let’s not worry about the cost. We’ll think about that later.
Marian Tupy: So right now we are obviously in the middle of the conflict in Iran and the prices of gas are going up. And people have already suggested, some people, that we should cap the prices of gasoline. But we’ve been here before in the 1970s. We had a gasoline crisis with price controls. What does the 1970s episode have to teach us about what to do when gas prices are going up because of geopolitical conflict?
Brian Albrecht: Yeah, so this is a huge topic, and every few generations you need to relearn this. You mentioned Milton Friedman. I think there’s a quote by him that the next generation will have to relearn the issues of price controls. And this is kind of where we’re at and one of the things that I’ve been dealing with for a while here. So yeah, I have work with Alex Tabarrok and Mark Whitmeyer that studies the 1970s oil crisis that then led to high gas prices and then the policy responses. And there’s a lot that happened there.
Brian Albrecht: The stories are generally known by people who know history and stuff, that there were gas lines. There’s some other weird things about some cities had gas lines, the Northeast had a lot of gas lines and a lot of the country didn’t. And so there’s kind of this interesting difference across place. But there were also energy caps on different things that kind of affected the economy in different ways. And so it all circles back to the core idea that when you cap those prices, when it’s like the banana example, prices aren’t able to adjust. If the government comes in and says that bananas are a cent apiece, okay, people aren’t going to economize in the same way. Or people aren’t going to respond to that, respond to the real fact that there’s less supply than there was before the conflict.
Brian Albrecht: And so in any world that that signal is not being conveyed, scarcity is still there. We started this conversation off that economics and price theory starts from the point of scarcity. There still is only so much gasoline, crude oil, all the parts in the world available today, and that the price control doesn’t change that. It just hides it and masks it in different ways. In the ’70s, it showed up as gas lines. Other points in time, it shows up in different types of shortages. But I mean, that’s just been played out so much.
Brian Albrecht: Ryan Bourne at Cato’s got a book on the war on prices and there’s a great chapter in there about price controls going through history. And it’s just, there’s literally, I think it’s one of the areas where you’ll find economists who disagree, but so many economists will be like, “Yeah, price controls, yeah, that’s not going to be a good way to allocate resources,” because of the… I mean, it’s just so fundamental to thinking through prices and thinking through how markets work.
Marian Tupy: Yeah. Tyler Cowen has written a couple of pieces, I think it was Tyler Cowen, about the great relearning. In other words, that the lessons that people had learned in the 1970s, price and wage controls and rent controls and things like that, that we have forgotten them and now we are beginning to relearn them. Now, this is a bit off-topic, but it’s something of great interest to me. So as an economist, do you simply think that people are… That economic understanding is just so counterintuitive that unless you teach it to people, they are simply going to… That the default position is essentially one of some sort of a diktat socialism. If every generation needs to be retaught these lessons, then clearly the default, human nature must be the opposite. Have you thought about that?
Brian Albrecht: I’ve thought about it only in the context of Hayek has this idea that there’s… I forget the exact words, but he has fancy words for it… But there’s like our day-to-day local lives and then there’s the things in our bigger lives that now markets allow. And his basic point is our brain evolved to think about the microcosm. I’m pretty sure that’s the word now.
Marian Tupy: You’ve nailed it. It’s the micro versus macrocosm.
Brian Albrecht: Yeah, yeah, the micro and macrocosm. Yeah, it hit me midway. The microcosm of the family, of the tribe and stuff like that, and that’s how kind of we’re wired. And these things in which modernity brings through, especially through markets, but even say things like through the internet and social media and stuff, there are parts of our lives that are in tension with that brain developed in the microcosm. So the macrocosm is different. So I do think that there’s… That’s just a fundamental tension we have to keep dealing with.
Brian Albrecht: I’ll add one thing that I think makes economics a little bit tricky, which is there’s a tension between the things that are trivial and just so intuitive and then trying to carry it out to things that aren’t so intuitive. So when I tell my students on day one that there’s tradeoffs, everyone nods along, “Yes.” When I ask, “Okay, if the price of bananas rise, do you buy more of it or do you buy less of it?” Okay, yes, yes, everyone nods along. And so there’s an intuitive part that we think we understand, and then we think we can make the jumps to ten steps down the road.
Brian Albrecht: And that’s where I think you get a little bit… I think it ties to the microcosm-macrocosm point, but it’s a little bit… It’d be almost better, it’d be almost easier to teach if it was completely intuitive or completely unintuitive. Because if it’s completely unintuitive… Like, you mentioned that I studied physics. When you start going into quantum, nothing’s intuitive. And so you don’t think you can intuit it. You’re just like, “No, I’ve got to look at the experiments, I’ve got to figure out the math. There’s just no way around. I’m not going to reason to how quantum predictions work and how the equations work.” And so economics is in this weird spot in which some of it is intuitive and some is not.
Marian Tupy: Speaking of scarcity, because after all, you say, and economists agree, I think that Thomas Sowell’s Basic Economics starts with “economics is the study of scarcity.” There’s this view, almost idealistic vision of the future, where AI and robots are going to create a world of almost like capitalist communism, where you still have free markets, but AIs and robots are going to give us everything we need. I wonder if that kind of future is ever possible given that human needs or human desires are infinite. So if you have human desires which are infinite, then it doesn’t really matter whether you have two billion robots or ten billion robots. There’s always going to be scarcity. I think everything sort of depends on what we mean by infinity of human desires.
Brian Albrecht: Yeah, yeah. I mean, it’s a big question and it’s something I was working on this morning on a paper related to this about how when we get more stuff, the things that we didn’t even realize we desired, turn out we can show those desires, right? A person in 1900… Actually, this is a good example. There was just this LLM that was released that was only trained on text up to, I believe, 1913, something like that.
Marian Tupy: Oh, up to 1930, yeah.
Brian Albrecht: 1930, yeah, that’s what it was. 1930, yeah. And so you ask it questions. One of them I saw on Twitter was, “What is a computer?” And the LLM spits out that a computer is a person who works in a… That computes, that figures out where the stars are moving and things like that. Because the LLM is trying to be a prediction of what the person in 1930 would think. They can’t imagine what we think of as a computer. And so therefore they don’t know that there’s this desire out there that’s possible.
Brian Albrecht: And so that’s a way in which we think of human desires being infinite. That each time I don’t have to worry about where my water comes from, so therefore I can buy something a little bit fancier, and I can worry about the next thing. Some of that may be market resource related, some of it may be social status, whatever. And so at least so far, it seemed like that fundamental idea that as soon as we can kind of take care of something without worrying about it, there’s another desire that people want, seems to exist. And so it seems like there’s no reason, I can’t think of a good reason why that would disappear.
Brian Albrecht: And the fundamental scarcity that, at least for the time being, is not settled is time. Even if the AI are doing all the work and providing me with all the things, the time with my kids is still scarce. And so once there’s scarcity, then there’s tradeoffs, and so now we’re thinking about those sort of things. So I think that things will change, of course, and we have different timelines in which people predict that things will change, but there’s still… I mean, the new desires keep coming. So like the types of, go a little bit closer to my own work, the types of data work that I could do in research just wasn’t imaginable to people in the 1970s. Like, the data didn’t exist, the computational power didn’t exist.
Brian Albrecht: So the moment those things come along, now it’s a thing we can try to work on and try to dig in more to. So yeah, I mean, it’s just… I’m excited for what AI is going to do. There’s a lot of open questions. I’ve been writing a lot on it. But the core principle of scarcity doesn’t go out the window all of a sudden.
Marian Tupy: So we are living right now through this period of elevated prices. A lot of people are talking about abundance, and much of the criticism of the economic conditions in the United States don’t actually look at the original causes of the elevated prices, such as inflation caused by government printing and borrowing and so forth of money. They focus on greedflation. In other words, it was companies that are greedy that have elevated prices. What’s wrong with that take on what happened in the last, say, six years?
Brian Albrecht: Yeah, so I think if you’re going to explain a change, as in like the change not just in the trend of inflation, but… Sorry, not just a change in the prices, but a change in the trend of inflation. We went from kind of a consistent 2% to hitting 9% inflation in the US for a little while. I think if you’re going to explain a change, you need a change or a more complicated theory.
Brian Albrecht: So for example, you put forward bailouts and government spending. That’s a change. We can imagine that as being outside of kind of the normal economy. All of a sudden the government spends a lot more money and that now people have more money. That’s a change. We can use that to trace out a cause of prices rising. The war in Ukraine, the Suez Canal, the Strait of Hormuz, these things are a change that can drive price changes. The problem with any greed story is you need some reason why all of a sudden that activated in 2022, 2023. No one really claims that all of a sudden companies got greedy.
Brian Albrecht: So people will use this idea of greedflation, but then when pushed on it, it’s like, “No, we don’t actually mean that they’re all of a sudden greedy. We mean something else.” And when you kind of push a little bit more on what that something else means, it becomes vague. Oh, there’s concentration in the markets, but there was concentration before. It’s there’s some sort of conspiratorial thing, but why weren’t they conspiring before? And I think overall it’s just, I don’t think it has any empirical bite. To say that prices rose because of greed is to say that a plane crash was caused by gravity. I mean, sure, but it’s not really what we’re looking for. We’re looking for what change, what was out of the ordinary to cause that rise from 2% inflation to 9% inflation.
Marian Tupy: So for those listeners who are perhaps not very familiar with what inflation means in this sense, so inflation means an increase in the overall price level, right? And if you have a set of goods and you only have $100, then every time you increase the price of one good, then there is less dollars to go around to buy the other goods, right? But if you suddenly have $1,000 instead of $100 and the set of goods that you had to start with remains the same, then you can potentially increase the prices like that, right?
Brian Albrecht: Yeah. So this is one of the tensions from a, let’s say, a micro theory of inflation. So say you want to blame the 2022 inflation on the Ukraine war. Okay, it’s very clear that from the US perspective, all of a sudden oil prices rose. That pushes up oil prices, and oil is an input into other things, and so that kind of mechanically pushes up the prices of lots of goods that use a bunch of oil. But the consumer, to take your example, if you still only have your $10, then there’s less demand for the things that don’t use a bunch of oil. And so then you buy less of that, and so there’s, it’s not necessarily true that they completely cancel out, we’ve got to be more careful, but there’s at least a major force fighting against the oil price rise.
Brian Albrecht: So yes, oil prices rose a bunch, but because people only have a set amount of dollars, they kind of don’t spend as much. And so it’s hard to generate something like a 9% inflation with just that effect. You need to have something else going on that kind of turns people’s $10 into $100. Whether that’s actions that the Fed is doing, in different periods of time that could be gold inflows, I mean, it’s a little bit more complicated, but at least you want to start looking at those sort of macro effects, those macro policies in order to justify a macroeconomic effect. Because oil is a big thing, for sure. It’s a huge part of the US economy, but it’s not the whole economy. And so there’s this offsetting force that you need to take seriously.
Marian Tupy: Now, let’s talk a little bit… When I thought about interviewing you, one of the most exciting things that I wanted to talk to you about in terms of your research is your work on monopolies and market concentration. So one of the arguments made for inflation was that there are these large companies in the United States which have a tremendous sway over the market and they can increase their prices. I guess my first question is what is the difference, or rather, a lot of people seem to be confused between market bigness and monopoly. They look at Apple or they look at Walmart or they look at Amazon and they say, “This company is so big, it is a monopoly.” But these two terms are really not identical, are they?
Brian Albrecht: Yeah, and there’s not a perfect divide, but let me try to conceptually separate them. If you’re going to talk about a monopoly, the strictest sense would be one seller, and this grew out of ideas where, times in history where you truly did have one seller. The king said that only one person could, you know, build houses. I forget the exact examples. I’m not a historian.
Marian Tupy: Import, export wool or…
Brian Albrecht: That’s a great one. Yeah, yeah.
Marian Tupy: Or salt.
Brian Albrecht: Yeah, yeah, yeah. There’s importing of salt, of the East Indian Trading Company getting sole control of this sort of thing. So that’s the monopoly. In economics now, we kind of, okay, it doesn’t need to be one, but it’s like one big player in a market. So then that requires you to define a market. Well, what is a market? Well, a market is goods, buyers and sellers that kind of trade off against each other. There are different formal definitions about it. But let’s say there’s a market for bananas. I think we can coherently say there’s a market for bananas in the US. Okay, so you start defining it, and there being one seller, one dominant player, you could imagine that company being something like a monopolist, or at least to have market power, as economists would want to generalize outside of monopoly.
Brian Albrecht: That gets complicated when you start talking about across different markets. And so when you, okay, what if you’re a very small player in a lot of different markets? Well, that could add up to being a very big player. So for example, Amazon is not that big in terms of pure retail, it’s not the biggest player in terms of retail, it’s not the biggest player in terms of groceries, it’s not the biggest player in terms of, fact-check me on all these, but you get the broad idea. But you add up enough of those, you become a very big company. And so there’s a bigness difference there. There’s also issues around, companies can be big because there’s… Yeah, I mean, there’s just not really a great definition across all of these setups.
Brian Albrecht: And so people kind of move between them. They think that there’s a lot of power or something because a company is really big, but maybe it’s just in a lot of different things and it’s diversified. And if it doesn’t have any sort of privilege or any sort of entrenchment, I think monopoly is kind of a weird term for it. One other distinction I think is worth making is when we talk about the East Indian Trading Company or we talk about these benefits from the king, that’s kind of something given from politics or for some other reason that kind of puts you in a position, you as a company, you control this market. Whereas big companies are often just about winning a market. It’s about… Or winning lots of different markets, to go back to my other point. If you come in, you provide lower-cost goods, you provide higher-quality goods, you’ll win the market. And so you’ll get concentration, maybe by some metric, you’ll become a bigger company.
Brian Albrecht: But I think we do fundamentally want to distinguish between kind of a granted privilege and just being the best producer at something. We have lots of research on international trade that when trade barriers go down and you happen to be the best producer, you enter the other market and your size grows. By some measures, the market gets more concentrated because you’re able to take advantage of your quality or your cost savings and to grow and to win and become a bigger company. And so I think that that’s a fundamentally different angle than the kind of old-school, oh, who is the player that’s sitting there right now? They’re there because they stole something or there’s some unfair reason and therefore they have some power over you.
Marian Tupy: Right. So we have government-enforced monopolies. Just as the King of England could say, “You, Brian, can only import salt and me, Marian, I can only export wool,” and this is how we are going to get our rents. We also have natural monopolies, which are kind of a difficult thing. Like for example, you can maybe only build one railway from place A to B. But fundamentally, people misunderstand what monopoly means in today’s marketplace in the United States and how often companies change.
Marian Tupy: I mean, for example, Xerox used to be a dominant company in the American market. IBM: when was it the last time that you were concerned with IBM as having monopoly power in computing? So yeah, these big companies may seem like invincible behemoths for a long time before collapsing due to competition. And people perhaps shouldn’t be too worried about that. Now, however, people sort of feel uncomfortable when they hear about, for example, JetBlue wanting to take over Spirit or United wanting to take over American Airlines. They feel that this market concentration will unavoidably result in high prices. How often does it actually happen in the marketplace that big companies raise their prices rather than take them down?
Brian Albrecht: Yeah, so I would distinguish a few different things there. It’s a great question. I think if you’re looking at the broad sweep of things, it’s clear that the way to get rich is to lower prices. That’s how Costco…
Marian Tupy: That’s counterintuitive. That’s quite counterintuitive. Can you just explain that?
Brian Albrecht: Yeah, I mean, right now, the retailer that everyone’s talking about is Costco. Costco has low prices. And when you get low prices combined with your membership fee that people are happily willing to pay, you get a lot of customers, you get really big, right? No one’s going to come around and say, “Oh, the reason that Costco has a lot of profit is because they’re charging crazy high prices.” No, we all recognize that they’ve come in and they’ve lowered prices. Maybe not every item by every item, I’m not trying to make that claim, but as a bundle, that’s what they’re doing. Before that, it was Walmart. Okay. Way back, it was A&P. Companies that have lowered prices.
Brian Albrecht: And even things like tech, I mean, Microsoft or Apple, these companies and the OEMs working with Microsoft have lowered the price of computers and become big because of that. They’ve lowered the price of a lot of different things. So that’s kind of the default way for most companies to make money is to be able to find a cost saving. Because you have a cost saving, you can lower your prices and still remain in the market. Because you can lower your prices, you can attract more customers and therefore you get a lot of profits. At least, not necessarily every quarter or something, but kind of the long trajectory of these things. There’s a…
Marian Tupy: And it also protects you against competition, right? It makes it more difficult for competitors to jump in.
Brian Albrecht: Yeah, yeah, for sure. There’s a world in which if I was born in 1920, maybe my job would be to open up a corner shop and sell recreational drugs and lollipops and all that and to be a retailer. But in today’s world, I just can’t compete with the scale of the Costcos or Walmarts or something like that. And you’d have to compete on a different margin, a gentler experience or some more boutique type of stuff. People still do it, but it’s just a lot harder. And so because they’re able to do that, the flip side is I’m able to do stuff instead of opening that corner store, right? I get to just talk about economics all day. And so that’s fun.
Brian Albrecht: And so yeah, these cost savings help consumers directly through allowing the lower prices, but also indirectly through freeing up resources for people to produce other stuff, to move into services. That’s kind of the long path of the US economy and a lot of the world. Now, there’s a slightly different question, which is: are mergers kind of a different way, and do they have a different way of growth? So what I just said is the company gets big because it’s found efficiencies, it’s found a way to be a better producer, it won more of the market. Yeah, that’s great.
Brian Albrecht: A flip side would be, okay, how can we get more of the customers? Well, what if all of us sellers get together and just decide that we’re going to join up as a legal entity and we’re going to sell together? We collectively are now bigger, but now we’re going to collude or something like that to raise prices, and that could be fundamentally detrimental. Okay, that’s a concern that people have. There’s always issues about whether, okay, if we all collude, does a new entrant come and fight us back and break the collusion, or whatnot? But at least we can conceptually separate out: we’re going to win the market because we’re going to be more efficient versus we’re going to win the market because we’re going to just convince everyone that we should stop playing this game, right?
Brian Albrecht: Adam Smith knows this. Rarely… I’m not great with quotes here… But rarely do men of business join together except for conspiring against the public. That’s not the quote, but it’s the general idea, right? That’s a fear, it’s a possibility. We have examples of that. Now the question is, mergers kind of sit in between. It’s not quite, I mean, it’s definitely not collusion, both in a legal and economic standpoint, but if you squint at it in a certain way, it’s kind of two companies coming together. And so then it becomes an empirical question, an economic theory question of: is it more like the Walmart case in which you’re going to get scale efficiencies and you’re going to be able to lower prices, or is it more like the collusion case in which you’re going to raise prices and have fewer goods? And for most of the situations in the world, it’s like Walmart. Companies need to come together, they have real efficiencies, there’s real synergies. But are there situations, in airlines or in other situations, in which it’s more like the collusive? And that really is kind of a case-by-case basis.
Marian Tupy: I would only say that to me, and you are the economist, so tell me if I’m completely off base here, but to me, that’s why international competition is so incredibly important. Because even if, let’s say United takes over American and then they take over JetBlue and Spirit and we end up with one company, so long as they are exposed to international competition, then it is much more difficult to collude and raise prices. And here it is the government which stands in the way, because British Airways cannot actually fly from London to Washington D.C., pick up customers, drop them off in Iowa and then fly over to Texas and things like that. So when you have international competition, I think it’s much more difficult to keep that kind of market share.
Brian Albrecht: That’s very well documented, that international competition, or even just broader geographic competition. This is a point I made earlier of when trade barriers fall. If you have a local… The government kind of gave you some special privilege to be the local banana producer, but it turns out that there’s international banana producers are way more efficient, they’re going to eat away at that. If they’re allowed to at least enter the market and kind of circumvent the regulation, then they’re going to eat away at that.
Brian Albrecht: That happens all the time. It’s one of the real benefits of international trade and international competition is if there are these kind of pockets of waste because of implicit collusion or inefficient mergers going through that, well, okay, maybe these things happen, but if there’s a constant force of external competition, again, international, cross-state, whatever it is, that’s a disciplining force no matter what. And we want that pressure on companies because that’s what, again, allows us to, in the longer run, lower costs, improve quality, and generate progress.
Marian Tupy: Let’s stick with the airlines for a little bit longer. Here is a question which actually freaks me out a little bit. Let’s assume that the internets out there have a lot of information on my income and your income. And at some point in the future, between the companies having a lot of information about me and you and knowing our spending patterns and knowing how much we can afford, they will start discriminating prices of plane tickets. So Brian is twice as rich as I am. He logs on to the American Airlines website and the price will be twice as high as it will appear for me because the company knows that he can afford to pay twice as much as I can. How do you feel about that kind of future? And what does an economist think about that?
Brian Albrecht: So, there’s a lot of feeling on it, reactions, but let me talk through kind of the starting point for the economics. We can work it out that the only way that that model works is that you’re able to lower prices for what we call the marginal consumer. Why do you not lower prices in general? Well, you’re worried that you’re going to have to lower prices for the people that you’re making profit from before. If you have to sell everyone, this is getting a little bit in the weeds here, but I’ll try to make it clean, someone comes along and says, “I’m not willing to pay $100. Will you give it to me for $50?” Why don’t you do that? Well, because the next person will come along and say that, will say, “Oh, I want it as well.” And everyone will beg for that $50, and so it’s kind of hard to enforce that.
Brian Albrecht: What price discrimination allows you to do, what we’re talking about, setting different prices across people is one form of price discrimination, is to lower it for the consumers that would not otherwise buy the good. Right? It’s allowing you to sell prices to, to lower prices for people who weren’t getting it before. And so that lowers prices generally for poorer people. If we’re going to say that willingness to pay is some proxy for income, it’s not the only thing, but it’s related to income, you’re going to lower prices for poorer people, you’re going to raise prices for richer people.
Brian Albrecht: The way you think about those tradeoffs from a policy standpoint, from a business decision-making standpoint, depends on the situation. But that’s like, that is, there’s no disputing that. The only way that price discrimination works is if you’re able to lower prices for some people, okay, and possibly raise for others. So that happens around. There’s general privacy concerns that people have that seem to be a little bit different. People just get the ick from being tracked. And so one… And I don’t, some economists study that, I don’t. But one thing to think about is all this is happening in a place of competition, right?
Brian Albrecht: If there are people who don’t like being tracked and they make a big deal about it, then, again, if people can enter, which is weird in the airlines example, so maybe entry is hard in the airlines example for a lot of regulations and things like that, but the company will enter. In the places that we see this a lot, there’s a little bit… Okay, so there was a big backlash when Wendy’s proposed some dynamic pricing that people thought kind of looked like a form of price discrimination. So people got worked up about it.
Brian Albrecht: At the same time, people love the McDonald’s app, and that’s price discrimination. It’s giving discounts on the app if you use that. And so it’s allowing, if people don’t know, and you don’t have as many kids as I do and don’t go to McDonald’s as much as I do, but you can save a lot of money if you use the app, and people don’t mind it. Sometimes people get worked up about it, sometimes people don’t. I think it really depends on the situation in general.
Brian Albrecht: And so I think our broad takeaway for thinking about price discrimination and what the effects are is we know it lowers the price for some people, usually it raises the prices for other people. It’s an empirical question about when these are big and when these are small. My reading of the literature is that often this ends up reducing prices. In the airline example, I think it’s something that’s allowed airline prices… This is a little bit more speculative, but this is my reading of it, it’s allowed prices to drop on average for airline goods. And it’s not the type of thing that is… I think we shouldn’t have the… We should try to understand it, we should think about the pros and cons, and people have different ways of thinking about that. But I think we shouldn’t start from a point of like, “Oh, this is horrible because something, something, it gives me the ick.”
Marian Tupy: Yeah, I think that people very often forget that poorer people would get a price cut, which makes me wonder why the left opposes it so much. Because if the left’s idea is that the rich should always pay more and the poor should always pay less, then they should really like price discrimination.
Brian Albrecht: Yeah, I mean, I’ve tried to push this line. I don’t know how much I believe it versus it being a little bit tongue-in-cheek. But yeah, I mean, I think we should definitely recognize that it lowers the price for the… It lowers the… The only way it’s profitable for firms to do it is if it gets new people into the door, which means it’s lowering the prices for some people. Those some people tend to be poorer people. That seems like we should take that seriously as one of the benefits of price discrimination.
Marian Tupy: Also, who knows where the technology will end up. It’s perfectly possible that there are going to be all sorts of ways in which people can hide their identity in the future, find ways. Maybe there will be third-party sellers.
Brian Albrecht: Yeah.
Marian Tupy: Where you actually call, “I’m looking for a plane ticket, I’m going to call Brian and say, ‘Hey Brian, buy this ticket for me,'” and so on and so forth.
Brian Albrecht: But that is… I mean, just to be clear on that, that is in some sense wasteful. And if we could come together and find an agreement to get around it, just as there’s a… People respond to the threat of theft by installing locks. The locks are a response that reduces the amount of theft that happens in the world, but those locks themselves are in some sense a waste. And so maybe there’s a role for policy to push one way or another. I mean, I think it really goes a lot of different ways.
Brian Albrecht: Let me just make it a little bit more concrete. So Maryland just passed a law, last I checked earlier this week, we didn’t have the exact wording on it, so don’t quote me on this exactly, but it was trying to basically ban this sort of price discrimination for grocery retailers, I believe just grocery, and kind of dynamic pricing, but there’s a lot of carve-outs. But it had stuff like you cannot use tracking information to lower prices in the store, which is not something anyone does, but they’re kind of imagining a future in which all these things happen. And maybe that’ll happen, but in the meantime, it’s not, I think, a first-order priority, but it’s kind of where we’re at.
Marian Tupy: So free-market economists always emphasize the importance of competition as opposed to regulation. You just talked about a policy response, which is essentially a regulation here in this case. Why should an ordinary person rely on competition as a better way of handling these deeply emotional and important issues?
Brian Albrecht: Yeah, I mean, I don’t know how much I can speak to regular people, but I think for me, I mean, you do think there’s a lot of trust that we put in the system because of competition, not just because of regulation. Yeah, we like to… People, maybe not listeners of this podcast and fellow travelers and whatnot, but general people, “Oh, the reason that I feel safe going to the grocery store is because of food regulation.” Well, not really. The reason you feel safe, maybe it’s partly because of that, but mostly just because of competition, that we believe that, maybe we don’t understand it, but it turns out because of competition, the Walmarts of the world are trying to keep safe, and they have to stay safe in order to keep getting customers coming back.
Brian Albrecht: Now, is that perfect? No, but no regulation is. But so it’s just like it’s a facet of the world that we rely on, and it allows us to go through our day and to use markets in a way that we wouldn’t if competition wasn’t there. And it’s kind of so ingrained, especially for people who don’t travel internationally so much. I mean, like buying stuff in the US, the idea of it being counterfeit or knockoff stuff at a mainstream store is just ridiculous.
Brian Albrecht: But like lots of other places in the world, that’s not true. And so it’s just built into the fabric of the way we’re operating that I think we take it for granted and we need to appreciate it in the same way that, or or a similar way to people… I don’t expect the person who’s walking past me to all of a sudden punch me in the face because there are social norms and things around that. There’s a lot of stuff that keeps the world moving that isn’t just regulation, and it’s the fabric of society.
Marian Tupy: So I was very fortunate in my life to be able to travel extensively, and I lived in many different places. And what struck me as extraordinary is that if you go to a different country, even to a different city in the United States, you always ask, “Is the water coming out of the tap safe to drink?” Right? And this is not only the case if you’re traveling to, say, Buenos Aires or Rio de Janeiro, but if you’re going to a new city in the United States and maybe you’re staying with friends, you ask, “Can I drink the water out of the tap?”
Marian Tupy: However, people never ask this question when they are opening a can of Coca-Cola or a bottle of Coca-Cola. I remember distinctly traveling through Zimbabwe at the time of the hyperinflation, this is 2008, and basically this was the second highest hyperinflation in the world. You couldn’t buy anything. But we chanced upon this shack in the middle of nowhere that was selling ice-cold Coca-Cola. And opened it, drank it, never thought twice about it because I simply assumed, like anywhere else in the world, that it was going to be perfectly safe. And that’s one of the reasons why I try to promote the free market, and I suspect that you do too.
Brian Albrecht: That’s such a great example, and I’m ashamed that I had not thought about that connection because I’ve written a bunch on the importance of brands. I mean, brands, they’ve got to fight to protect that there’s not knockoffs. But the fact that I can go into a McDonald’s anywhere in the world and expect some level of quality, maybe it’s not the exact same as in the US, it’s often not, but I can put faith in that. Maybe it’s not what I want to do, but that exists as an option, and people like that when they’re traveling.
Brian Albrecht: The Coca-Cola example is great. I’m sure there’s borderline cases, like something that looks like a brand that you kind of recognize, but maybe it’d be a little bit sketchy if you’re doing it in Zimbabwe, but maybe you wouldn’t think twice in Minnesota or something. But the real power of these big brands that’s made them so big, to circle back, is that they just have been able to, one, keep the quality so good that you trust that you know what you’re going to get, and then two, reach a price point that they can be anywhere in the world. And that’s incredible. And I think we should recognize that and be in awe of it as a… Not just like a moral reason in which it’s amazing, but it just is like a phenomenon. It’s like, how does this happen?
Brian Albrecht: To circle back to price theory, trying to understand how is this possible? What are the incentives and rules of law and institutions and everything that brings it together, the competition that makes this possible, and try to understand it. And that’s what I try to do in my research.
Marian Tupy: Well, I’m very grateful for your time. And as I said, I love talking to economists who try to explain economics to people and really give us an insight on why are we so rich compared to our ancestors. And I hope that people are going to see this podcast and are going to learn one or two things and hopefully become a little less skeptical about competition and a little more appreciative of the free markets and capitalism. So, Brian, thank you very much for the time that you have given us.
Brian Albrecht: Thank you so much. This was a lot of fun.