McCloskey at Chicago, Take Two

It was a pleasure and an honor to reminisce about Dee McCloskey for the Festschrift volume just released by the University of Chicago Press. It was less of a pleasure to discover that the U of C Press had ignored all the editorial corrections I sent them.

If you run into this volume, please don’t read my chapter. Read the corrected version here instead.

Click here to comment or read others’ comments.

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34 Responses to “McCloskey at Chicago, Take Two”


  1. 1 1 David R. Henderson

    Beautiful! Just beautiful. I almost cried while reading this. Thanks, Steve.

  2. 2 2 Bob Murphy

    Steve: phenomenal stuff. FWIW, I am still hoping that I one day can write an economics book like *Armchair*. It’s really in a class of its own.

    Regarding the Hyde Park question, was there more context? E.g. if you told us the answer, would we then be able to say with equal validity, “If food production is costly, then it’s possible Chicago has too little hunger”?

    If not, then you need to tell us more, so we know what you guys knew, when trying to figure out the answer.

  3. 3 3 Bob Murphy

    (Oops I meant “expensive” not “costly.”)

  4. 4 4 Steve Landsburg

    Bob Murphy:

    E.g. if you told us the answer, would we then be able to say with equal validity, “If food production is costly, then it’s possible Chicago has too little hunger”?

    The meaning of the statement about food production is perfectly analogous to the meaning of the statement about crime prevention, so you’ve completely understood the intent of the statement. On the other hand, the likelihood of “too little hunger” seems far lower than the likelihood of “too little crime”, since food is generally provided by markets that work pretty efficiently, whereas crime prevention is provided collectively.

    But of course it still is *possible* for the world to have too little hunger. If politicians decided to cure hunger by directing massive resources to subsidizing agriculture, they might succeed — at the cost of directing those resources *away* from, say, medicine — so that we all end up well-fed and dead of infectious diseases.

  5. 5 5 Dan

    This is great stuff. A question:

    “…insanity of trying to allocate a scarce resource without using prices.”

    What are the circumstances in which it would be OK to allocate resources without prices?

  6. 6 6 Pat

    That almost made up for your lack of blog posts that I’ve paid zero of my hard earned dollars to read. Seriously, thanks.

  7. 7 7 Manfred

    Dan @5:
    People can correct me if I say this wrong, but, if a central planner knows all the preferences of everybody in the economy, has perfect information about technology and costs and knows all the resource constraints, then, in principle, the central planner could allocate resources without prices.
    But you would have to have lots and lots of knowledge, which, in practice, you don’t. Hence, a market price allocation is superior.

    I think this is the nutshell.

  8. 8 8 Steve Reilly

    Good stuff. But these are the two puzzles I don’t get: “A frost in Florida won’t cause a shortage of oranges. When there’s an increase in the price of steel, car prices will rise by less if the auto industry is monopolized than if the auto industry is competitive.” Anyone?

  9. 9 9 David R. Henderson

    Steve Reilly,
    No shortage because price will rise to clear the market.
    To get the second point, you need to draw the D curve, MR curve, and MC curve (all for monopolist) and then shift the MC curve up. Check effect on price. Then imagine that the MC curve is the horizontal sum of all the individual firms’ MC curves (for a competitive industry). You can show it all on one graph.

  10. 10 10 Steve Landsburg

    Steve Reilly:

    1) When there are fewer oranges, the price rises until the quantity demanded is no greater than the quantity supplied. Everyone who wants an orange at the new higher price will be able to get one, so there is no shortage.

    2) Re the increase in the price of steel, this one takes a little more care with graphs and/or equations to explain completely. But the basic idea is that a monopoly auto industry will already be charging such high prices that any additional increase is sure to drive away a lot of customers. (If this weren’t true, the monopoly would already have raised its prices even further, before the steel price increased.) So when the cost of a raw material increases, it’s generally in the monopolist’s interest to eat most of that cost increase rather than trying to pass it on to consumers.

  11. 11 11 Steve Reilly

    Ah, thanks.

  12. 12 12 Steve Reilly

    By the way, am I correct that if the price of steel rises the price of cars will still be lower if car manufacturers are competitive rather than a monopoly, it’s just that the rise in price would be lower (since the monopoly would already be charging higher prices)? Also, just curious, was that JFKS’s advisers you meant?

  13. 13 13 Daniel

    @Dan,

    If a resource is not scarce then why should there be any price? Would you have us charge a head price for oxygen consumption?

  14. 14 14 Enrique

    What a beautiful essay. I need to find a used copy of McCloskey’s “applied theory of price”.

    In addition to all the points raised in the “Mccluskey at Chicago” essay, I also admire Mccloskey’s treatment of “the so-called Coase theorem”.

  15. 15 15 Joe Greene

    Steve Reilly,

    Yes, the monopolist’s price will still be higher. It’s the price *increase* that will be smaller.

  16. 16 16 Bill

    Terrific tribute! Thanks for sharing this on your blog.

  17. 17 17 Teddi

    Steve,

    What I personally got from this article is the notion: If you force society to pay for a “thing”, you are assuming all of society wants that “thing” over a “different thing” thereby creating an opportunity cost some might not want to take. With a pricing model, these issues do not crop up. Is this right?

    In the wall-mart example: If you force wall-mart to raise prices, then the cost of their goods increases. For the customers not working for wall-mart, who cannot afford those new prices, they will look for more sources of payment and increase the labor supply thereby pushing down wages – not to mention the structural unemployment effects from an increase in a minimum wage for wall-mart. Doesn’t this assume wall-mart is the only distributor of retail goods in an economic system? Why would customers only go to wall-mart for their goods and not a competitor who would be selling the same goods at a lower price? Assuming a sufficiently competitive market, wouldn’t it be more realistic to have wall-mart go out of business in the long-run? What am I misunderstanding?

    Also what do you mean by the Larry Summners example? I genuinely haven’t thought about this before, but can you describe externalities via a market model? I always thought externalities were instances “outside of” a market which had NO price (therefor no market) and lead to the tragedy of the commons where people over-used or under-used a good/service. Could you go into detail?

    Also theory is all well and good, as it helps guide our decision making, but is there concrete evidence of these ideas? Is there a broad real-world example where market prices for wages are forcefully increased in one sector to a point where we see a decrease in wages in all other sectors of an economy? Also by how much is a pretty good question to ask too.

  18. 18 18 Advo

    I figured out (guessed) the monopoly/steel problem intuitively.
    What happens in the case of gasoline taxation?
    I suppose if higher quality gasoline really offers an advantage, if you tax all gasoline qualities equally at 20 cents, then high-quality gasoline becomes relatively cheaper and the average (equilibrium?) quality goes up.

  19. 19 19 Advo

    I disagree with the Walmart example, I think it’s wrong.
    The analysis fails to take into account the larger developments within the retail sector.

    Here is what will happen:

    If public pressure forces Walmart to raise wages, that will force Walmart to raise prices.
    As a consequence, Walmart will become even less competitive vs. much more efficient and MUCH cheaper German grocery discounters such as Aldi and Lidl, which are currently expanding massively in the US (after devastating British grocery retail).

    This will accelerate the paradigm shift away from the highly inefficient and expensive Walmart retail model towards the lean German grocery discount model.
    Aldi and Lidl also happen to pay substantially higher wages than Walmart.

    The end result will be:
    1. Fewer jobs in grocery retail, but higher pay
    2. Substantially cheaper grocery prices

    Point 1. means a negative impact on wages of lower quality, low-skilled workers and a positive impact on high quality (motivated), low-skilled workers.
    Point 2. has a large positive effect on the purchasing power of low-income population segments.

  20. 20 20 Richard D.

    “Two of the smartest economists of my generation are Larry Summers …. ”

    Two years ago, I attended an economics conference at
    Stanford (as visitor, not professional). At one
    seminar, the speaker remarked, “Larry Summers also
    wrote about this topic, and for once, he got it right”,
    which elicited many chuckles around the room. From
    this single data point, I surmised Prof. Summers’
    intellect does not enjoy universally high esteem.

    PS You might perhaps redact the essay quote, from “are” to “were”

  21. 21 21 Richard D.

    SL:
    “When there are fewer oranges, the price rises until the
    quantity demanded is no greater than the quantity supplied.
    Everyone who wants an orange at the new higher price will be able
    to get one, so there is no shortage.”

    hmmmm… following this reasoning, prices will always rise to
    equilibrate demand, and ‘shortage’ becomes a vacuous term.

  22. 22 22 Bob Murphy

    Richard D., two things about your Summers anecdote:

    (1) One could think an economist was really smart but usually wrong on important policy issues. E.g. I actually do think that about Paul Krugman.

    (2) Summers has been associated (he says unfairly at times) with some controversial positions, so it makes sense that Steve Landsburg would think he was great but a room full of economists in California would want to publicly distance themselves.

  23. 23 23 Mark Harrison

    Yes, an excellent piece which captures my experience – first with McCloskey’s textbook as an undergraduate, later as a graduate student at Chicago (after McCloskey’s time, but still with the same approach to price theory) and then teaching – using David Friedman’s and then your textbook. I used to put about 50 true, false or uncertain questions in the course outline for the students to answer before and after the course. They were all false, but most students initially answered true to them all.
    Becker had a counter-intuitive T, F or U question on monopoly which seems to imply that your statement “When there’s an increase in the price of steel, car prices will rise by less if the auto industry is monopolized than if the auto industry is competitive” is not always true.
    The question was “It is possible that a $1 unit tax on the output of a monopolist will result in an increase in price (including the tax) that is great than $1”.
    I drew a linear demand and constant marginal cost diagram, answered false and failed the question (I think this is the diagram David Henderson, above, had in mind).
    The answer is true – if the monopolist faces a constant elasticity demand curve (which must have an elasticity greater than one – otherwise the monopolist would always increase profits by raising price). The monopolist’s first order condition for maximising profits can be written as P = MC*e/(e – 1) where e is the (absolute value of the) elasticity of demand. You derive this formula on p.316 of the 9th edition of your textbook.
    A $1 tax, therefore, would raise price by more than $1 if e were constant (a more common assumption than linear demand in econometric studies) – and if you draw the monopoly diagram with a constant elasticity curve, you will see that is right.
    So, for example, a $1 increase in constant MC would increase price in a competitive industry by $1, but price in a monopoly by more than $1 if the demand curve is constant elasticity. Of course the cost increase would decrease monopoly profits.

  24. 24 24 Steve Landsburg

    Mark Harrison: Point taken. I should have said not “car price *will* rise” but “car prices *can* rise”.

  25. 25 25 Ken B

    @21 Richard D.
    No. This is like saying anything that characterizes out-of-equlibrium is a vacuous term in thermodynamics because things tend towards equilibrium. In equilibrium there are not heat flows, but heat flow is a useful concept. If there are flaws in the market or interference in the market you can get out-of-equilibrium phenomena. Shortages are one of those.

  26. 26 26 Enrique

    Here’s another economic puzzle I’ve always wondered about: Why is guac extra at Chipotle but not Qdoba? (See: https://priorprobability.com/2017/01/24/why-is-guac-extra-at-chipotle/ ). What would McCloskey say about this?

  27. 27 27 Jonathan Kariv

    @Enrique #26 I don’t have anything resembling an answer here but it’s an interesting question. My first thought (which could well be obviously wrong to people who’ve thought harder about this than I have) is that maybe it’s beneficial to both Chipotle and Qdoba to have different pricing models. Perhaps if they do the same thing then they’re competing more directly but if they do different things then they both get to dominate a different section of the market.

    This might be extendable to the bonus question of other add ons. Maybe they’re just adapting to the other guys strategy.

  28. 28 28 iceman

    Advo 19 – Interesting theory but a) for WMT groceries is primarily a traffic driver for their core business = the most efficient ‘hard-goods’ retailer the world has ever seen (hard to dispute that I think). I’d agree that that distribution model did not seamlessly extend to perishables, but it’s not really intended to be a profit center (or so people in a position to know have told me); b) I think the question presumes that if WMT lost meaningful share in their core business the public pressure shifts to whoever the industry leader is…so what happens then…

    BTW I know people love Aldi and I’m not sure how they manage lower prices and higher pay; having spent some time in the UK I do know the grocery sector there was not that tough of a field to beat :)

  29. 29 29 Enrique

    JK: your explanation makes good sense; perhaps by comparison we could contrast “In n Out” hamburgers (simple menu; no frozen products) versus McDonalds (complex menu; low quality).

  30. 30 30 Karst

    “When there are fewer oranges, the price rises until the quantity demanded is no greater than the quantity supplied. Everyone who wants an orange at the new higher price will be able to get one, so there is no shortage.”

    When there are fewer atomic bombs, the price rises until the quantity demanded is no greater than the quantity supplied. Everyone who wants an atomic bomb at the higher price will be able to get one, so there is no shortage.

    I think there are some terrorists and rogue nations who would argue that there is indeed a shortage of atomic bombs.

  31. 31 31 Steve Landsburg

    Karst: Were you really under the impression that atomic bombs are traded in free markets?

  32. 32 32 Karst

    No. Of course not.

    I am (perhaps crudely, with snark) poking fun at the economic concept of “shortage” in free markets.

    The concept makes sense for free markets, but just does not apply to everything in the world. Shortage also applies to that which is in need and is not available. Not everything in need can be obtained by those who truly need it. It is in shortage for them—whether the shortage is due to price or to unavailability.

    A less outrageous example might be made by substituting certain essential medicines (essential for those who have certain diseases) for the atomic bombs of the original statement.

  33. 33 33 Teddi

    @ Karst

    You are missing the point.

    The fact that prices rise on a good which has run in short supply is, in some sense, a GOOD thing.

    In the short term, the good goes to those who are willing to pay for the appropriate price of the good. In the long run, this high price creates an incentive to allocate more of those resources to the places which need it most.

    When we artificially deflate the value of the good, or artificially monopolize the market in question, there is less of an incentive (or forced coercion in the case of a monopolistic entity) to move the goods there in comparison to another area which needs it as well.

  34. 34 34 Advo

    Iceman: Interesting theory but a) for WMT groceries is primarily a traffic driver for their core business = the most efficient ‘hard-goods’ retailer the world has ever seen (hard to dispute that I think). I’d agree that that distribution model did not seamlessly extend to perishables, but it’s not really intended to be a profit center (or so people in a position to know have told me);

    I think groceries now account for substantially over half of WMT’s revenues, and the “hard goods” are under assault from companies like Amazon.

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