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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, how markets work, why prices matter, and why good intentions often produce bad policy. 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, we’re trying to alert our listeners to 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. Online, you’re described as one of the chief defenders of price theory. Why does this amorphous idea matter for the great enrichment and for human progress?

One thing that makes the modern world unique is that markets are a huge part of our lives. Markets let us coordinate across time and place in a way we couldn’t have imagined 300 years ago. And price theory is about studying prices: what causes them to move, how they coordinate behavior, when policies affect them productively or destructively.

Can you talk about prices as a signaling mechanism, and draw out the distinction between prices emerging spontaneously under free markets versus politicians trying to set prices?

I take a line from Alex Tabarrok that a price is a signal wrapped in an incentive. Hayek used the example of tin. Users of tin don’t need to know where a shortage came from or whether there’s a new usage; they see the price go up. That allows coordination across time and place. I can decide whether to hold off on tin production or do something else with my factory because tin is more expensive—all that coordination comes from a simple signal.

Thinkers try to distinguish free market prices from others. What does the price of my electricity bill convey? It’s not set by the same forces as the grocery store, where Krogers, Albertsons, Walmart, and Costco bid for chicken from the wholesaler. There’s gradation, and at the other extreme is not allowing prices at all: a government edict, a ration.

The other aspect of prices is incentives. If you own a grocery store and set the price of bananas too low, you sell out and leave money on the table. That’s a signal to raise prices tomorrow. But when the government sets prices, the Politburo chief isn’t making that money. What incentive do they have to set prices in a way that conveys information?

So it’s not just free market prices that give a signal; a government-regulated price like electricity, with taxes and green levies on top, still allows people to adjust. But at some point you get a situation like we did in Eastern Europe, where I grew up, where prices are so divorced from reality that the system collapses.

That’s an extreme example. Less extreme is just shortages. Mayor Mamdani in New York is known for wanting subsidized government-led grocery stores, but those have been tried elsewhere. It’s not that the system collapsed; there are just shortages in these stores.

In public debates, politicians often ignore scarcity and tradeoffs. Why is it so difficult for people to accept that there are scarcities and tradeoffs?

People accept scarcity in situations where they face the feedback themselves.

Any time you go to the grocery store, you’re confronted with scarcity. In other parts of life, that feedback isn’t as tight. In a large organization, you make budgeting decisions that don’t affect you. If you spend extra on the company card, how tight is that feedback?

The government has more insulation because it doesn’t have shareholders. Local governments might have tighter feedback because they’re more responsive to voters. Totalitarian regimes don’t have any feedback.

Right now, we are in the middle of the conflict in Iran. The price of gas has gone way up, and some people have suggested that we should cap the prices of gasoline. But we’ve been here before in the 1970s. What does the 1970s episode have to teach us about what to do when gas prices are going up because of geopolitical conflict?

Every few generations, you need to relearn the lessons of price controls.

The stories from the 1970s are generally known. There were gas lines and energy caps on different things across the economy. It all circles back to the core idea that when you cap prices, people aren’t able to adjust to reality. There’s less supply than there was before the conflict, and price controls don’t change that; they just hide it. In the 1970s, scarcity showed up as gas lines. At other points in time, it showed up as different types of shortages.

Tyler Cowen has written that we’ve forgotten the lessons people learned in the 1970s about price, wage, and rent controls and are now beginning to relearn them. As an economist, do you think that economic understanding is so counterintuitive that, unless taught, the default position is some sort of diktat socialism? If every generation needs to be retaught, then human nature must be the opposite. Have you thought about that?

I’ve thought about it in the context of Hayek’s idea about the micro and macrocosm. His point is that our brain evolved to think about our day-to-day lives and families rather than larger systems. Modernity, especially through markets, but also through things like the internet and social media, brings those larger systems into contact with our brains, which developed in the microcosm, and that’s a fundamental tension we have to keep dealing with.

Another thing that makes economics tricky is that some parts are intuitive and some parts are not. When I tell my students there are tradeoffs, everyone nods. When I ask whether they’d buy more or fewer bananas if the price rises, everyone answers correctly. There’s an intuitive part we think we understand, and then we think we can make the jump ten steps down the road. Economics would almost be easier to teach if it were completely unintuitive. When you go into quantum physics, nothing’s intuitive, so you don’t even try to intuit it; you look at the experiments and the math.

There’s an idealistic vision of the future where AI and robots give us everything we need, eliminating scarcity. Is that kind of future possible, or are human desires infinite?

I was working this morning on a paper about how when we get more stuff, we discover desires we didn’t even realize we had. There was an LLM released that was only trained on text up to about 1930. You ask it what a computer is, and it says a computer is a person who computes because it’s predicting what a person in 1930 would think. They can’t imagine what we think of as a computer, so they don’t know that desire is possible.

That’s how human desires are infinite. Each time I don’t have to worry about where my water comes from, I can buy something fancier and worry about the next thing. Some of that may be resources, some social status. So far, as soon as we can take care of something without worrying about it, another desire appears. I can’t think of a good reason that would end.

The fundamental scarcity that isn’t settled is time. Even if AI does all the work, time with my kids is still scarce. And once there’s scarcity, there are tradeoffs. I’m excited for what AI will do, but the core principle of scarcity doesn’t go out the window.

Let’s talk about your work on monopolies and market concentration. A lot of people seem confused about the difference between firm size and monopoly power. They look at big companies like Apple, Walmart, or Amazon and say that they are monopolies. But those two terms aren’t identical, are they?

A monopoly, in the strictest sense, means one seller. The term grew out of times when you truly had one seller; the king said only one person could do something. In economics, it doesn’t need to be one seller, but rather one big player in a market. With one dominant player, you could imagine that company being a monopolist, or at least having market power. But what if you’re a small player in many markets? Amazon isn’t the biggest in retail or groceries, but add up enough, and it’s a very big company. Companies can be big because they’re diversified. “Monopoly” is a weird term for that.

Another distinction: the East India Company’s monopoly privileges came from politics, but companies often get big by winning a market. If you provide lower-cost or higher-quality goods, you’ll win the market and become a bigger company. That’s fundamentally different from the old-school idea of a player who’s there because they stole something and have power over you.

Right, so people often misunderstand what it means to be a monopoly. Still, people feel uncomfortable when JetBlue wants to take over Spirit. They feel concentration will result in high prices. How often do big companies raise prices rather than lower them?

In the broad sweep, the way to get rich is to lower prices.

The retailer everyone’s talking about is Costco. Costco has low prices. Combined with a membership fee that people happily pay, they get a lot of customers. No one says Costco’s profit comes from crazy high prices. They came in and lowered prices, maybe not on every item, but as a bundle. Before that, it was Walmart. Way back it was A&P. Even in tech, Microsoft and Apple lowered the price of computers and became big. That’s the default way most companies make money: find a cost saving, lower prices, attract more customers, and get profits over the long run.

And it protects you against competition, right?

Yeah, for sure. If I were born in 1920, maybe my job would be to open a corner shop selling lollipops as a retailer, but in today’s world, I can’t compete with the scale of Costco or Walmart. I could compete on a different margin, a gentler boutique experience, for instance, but it’s harder. The flip side is that I get to talk about economics all day instead of operating that corner store. These cost savings help consumers directly through lower prices and indirectly by freeing up resources for people to produce other stuff and move into services.

Now, when it comes to mergers, people are often concerned about collusion. What if all the sellers get together as one legal entity and collude to raise prices? We can separate winning the market by being more efficient versus winning by convincing everyone to stop competing, but mergers sit in between. Is the merger like Walmart, getting scale efficiencies and lowering prices, or like collusion? In most situations, it’s like Walmart, with real efficiencies and synergies. But in airlines or other situations, it can be more collusive, and that’s case-by-case.

To me, that’s why international competition is so important. Even if United takes over American, JetBlue, and Spirit and we end up with one company, so long as they’re exposed to international competition, it’s harder to collude and raise prices.

That’s a real benefit of international trade: if there are pockets of waste from implicit collusion or inefficient mergers, a constant force of external competition is a disciplining force. We want that pressure because it’s what lets us lower costs, improve quality, and generate progress in the longer run.

Let’s stick with airlines. Here’s something that freaks me out. The internet has a lot of information on my income and yours. At some point, between companies knowing our spending patterns and how much we can afford, they’ll discriminate the prices of plane tickets. If Brian is twice as rich as I am and he logs onto American Airlines, his price will be twice as high as mine because the company knows he can pay twice as much. How do you feel about that future?

Let me talk through the economics.

We can work out that the only way that price discrimination works is that you’re able to lower prices for the marginal consumer. Why do you not lower prices in general? Because you’re worried you’ll have to lower prices for the people you were making profit from. If someone says they won’t pay $100 but will pay $50, why not do that? Because the next person will say the same, and soon everyone will beg for $50.

Price discrimination lets you set different prices for different people and lower prices for consumers who wouldn’t otherwise buy the good. If willingness to pay is a proxy for income, you lower prices for poorer people and raise them for richer people. How you think about those tradeoffs depends on the situation, but there’s no disputing that the only way price discrimination works is if you lower prices for some and possibly raise prices for others.

If poorer people would get a price cut, and the rich pay more, why does the left oppose price discrimination so much?

I’ve tried to push that line, though it’s a little bit tongue-in-cheek. The only way price discrimination is profitable for firms is if it gets new people in the door, which means lowering prices for some people, who tend to be poorer. We should take that seriously as one of its benefits.

Also, who knows where technology ends up. There may be ways for people to hide their identity, or third-party sellers where you call and say, “Hey Brian, buy this ticket for me.”

That is in some sense wasteful. People respond to the threat of theft by installing locks, which reduce theft but are themselves a waste of resources. So there could be a role for policy there. Maryland just passed a law trying to ban this sort of price discrimination for grocery retailers. It had stuff like you cannot use tracking information to lower prices in the store, which isn’t something anyone does, but they’re imagining a future where that happens. In the meantime, it’s not a first-order priority.

Free-market economists emphasize competition over regulation. You just talked about a policy response, a regulation. Should an ordinary person rely on competition as a better way of handling these important issues?

People say the reason they feel safe at the grocery store is food regulation. But it’s not really true. It’s mostly because of competition. The Walmarts of the world try very hard to keep their products safe because they have to in order to keep customers coming back. Competition is a facet of the world that we rely on every day.

If you go to a different country, or even a different US city, you often ask whether the tap water is safe to drink. But people never ask that when opening a Coca-Cola. I remember traveling through Zimbabwe during the hyperinflation in 2008. You couldn’t buy anything, but we found a shack in the middle of nowhere selling ice-cold Coca-Cola. I drank it without thinking twice.

That’s a great example, and I’m ashamed I hadn’t thought of that connection because I’ve written on the importance of brands. Brands have to fight to protect against knockoffs. I can go into a McDonald’s anywhere in the world and expect some level of quality. The power of these big brands is that they keep their quality good enough that you trust what you’ll get and reach a price point that lets them be anywhere in the world.

To circle back to price theory, I try to understand how this is possible: the incentives, rule of law, institutions, and competition that make it possible. That’s what I try to do in my research.