Comments on: The correct way to argue with Milton Friedman

By: Micha Ghertner

Micha Ghertner — Mon, 23 Aug 2004 20:22:39 +0000

Huben’s right (that’s gotta be a first for me). This is a discussion of economics, not ethics. If Brian’s second to last objection is valid, then there would be no need to do economic analysis at all; we could simply consult libertarian principles and that would be that. The question here is whether government regulation is a net plus or net minus. Injecting libertarian ideology into the discussion only confuses the issue, and makes it less likely that those who ideologically oppose libertarianism will take the economics seriously. Which, incidentally, is evident in a number of comments in this thread and in Kevin Drum’s thread. If you expect non-libertarians to take economics seriously even when it leads to libertarian-friendly conclusions, you must be willing to take economics seriously even when it leads to non-libertarian friendly conclusions.

By: brian

brian — Sun, 22 Aug 2004 22:06:55 +0000

That post made no sense Mike. I’m not a libertarian and I haven’t said anything ideological in this entire thread. It was all arithmetic truism.

By: Mike Huben

Mike Huben — Sun, 22 Aug 2004 22:00:07 +0000

And thus Brian conceeds that his ideological legs have been cut out from under him, and resorts to the libertarian equivalent of a raspberry.

By: brian

brian — Sun, 22 Aug 2004 18:17:28 +0000

dsquared wrote: “It’s a standard game theory result that something which reduces your options can benefit you by reducing the number of bad options that you can end up agreeing to”. To which I asked who died and made dsquared the omniscient paternalistic boss of all?

By: Sebastian Holsclaw

Sebastian Holsclaw — Sat, 21 Aug 2004 19:20:23 +0000

Silly Adam, dsquared clearly meant ‘let us assume the landlord is a monopolist’. And you aren’t to challenge assumptions unless they are put forth by Friedman.

By: Adam Stephanides

Adam Stephanides — Sat, 21 Aug 2004 18:09:19 +0000

Where did the assumption that the landlord is a monopolist come from? Saying that the rental market is a seller’s market is not at all the same thing; viz. Manhattan, which is emphatically a seller’s market but afaik not a monopoly.

By: BigMacAttack

BigMacAttack — Fri, 20 Aug 2004 17:49:20 +0000

dsquared, Ok. Then. If the value of the product doesn’t impact the price the landlord uses to maximize profit what is stopping the landlord from making up the difference by reducing other amenities not covered by the law? Like repair time waits or landscaping etc? (I think when a product’s value changes the price you set to maximize revenue changes but if not then what about the above?)

By: dsquared

dsquared — Fri, 20 Aug 2004 17:08:11 +0000

Bigmacattack: You asked: If the value of the product changes, goes up, why can’t the landlord set a higher price and pass at least the entire cost along to the consumer? Because, if the landlord was a rational monopolist, he would already be extracting the maximum price possible. Brian: You wrote: The hot water statute deprives tenants of one of their options. Therefore he is poorer. In which case, I can only ask you to come back when you have taken a class in game theory and we’ll discuss the matter then. Removing an option can make someone richer, in precisely the way I specified.

By: brian

brian — Fri, 20 Aug 2004 16:39:25 +0000

The thing about Cambodian bonds is wrong. I can’t think of an example right now.

By: baa

baa — Fri, 20 Aug 2004 16:37:18 +0000

Tabarrok was making a simple point: Sometimes, a minimal requirement will hurt tenants. This is obviously true (as per the “$50 for shoes example”), and I don’t think D^{2 is denying it. (Are you?)

D}2 seems to be making a more complex point: even though minimal requirements sometimes hurt tenants, there are reasons having to do with power structure of negotiations that may make minimal requirements overall beneficial. I don’t think Tabarrok is disputing that, nor was it his main point. Can’t we all just get along?

By: Brian

Brian — Fri, 20 Aug 2004 16:30:33 +0000

dsquared, actually the stuff above about the options should have been addressed to you, not Kimmit. The weak tenant as a group will not prefer the law because, some among them will prefer no hot water, and those that prefer hot water will have the option of self-supply when transaction costs are low. (Since you can’t buy hot water at the drop of a hat, the illustrative tools might need to be changed.) Also, in addition to possibly wanting to help tenants, the policy makers will probably want to think about the detriment to humanity, which is minus $50. We don’t know if the policy makers want to help tenants but it’s a pretty safe assumption that they want to help humanity, so no statute.

By: brian

brian — Fri, 20 Aug 2004 16:14:38 +0000

kimmit, it’s trivial to see why Tabarrok is right. Every day, people pay dearly for options. Companies buy options on aircraft and people fork over hard-earned money for options on the Chicago Board Options Exchange. The hot water statute deprives tenants of one of their options. Therefore he is poorer. Also, the pricing assumptions are not absurd because they are almost, but not quite, the only ones worth discussing. If hot water can be supplied at $100 and the tenant values it at $150 then both the landlord and the tenant will try to get it installed and both will be competing for the $50 profit or consumer surplus (depending on whether you are the landlord or tenant) and the presence or absense of the statute is unimportant and so I didn’t discuss it earlier. What is important is the legal environment for the welfare of the people who value the hot water for much less. As for asymmetric info and transaction costs, if you want to suppose these are big factors, you fail to recognize that hot water and rent are just illustrative tools. We can easily change the illustrative tools to something financial (low transaction costs) and foreign (most dollar investors are equally disadvantaged in estimating default risk of Cambodian bonds, so asymmetric info is not a big problem).

By: BigMacAttack

BigMacAttack — Fri, 20 Aug 2004 15:46:41 +0000

Wow! Thank you very much. Alex Tabbarok – I cannot get to your site right now but I am pretty sure that in your original post you said something like the landlord cannot charge more than the cost or he would already be charging more. Doesn’t that pretty strongly imply perfect competition? And under perfect competition doesn’t the landlord charge $150 no matter what? Glen Whitman – ‘Then the price will rise by some fraction of the added cost, even though the consumer does not value the amenity at all.’ I don’t think that is true with a monopoly. If the landlord is already maximizing profit and the product value does not change, wouldn’t rising or changing the price decrease profit? If nothing changes and the landlord has already set a profit-maximizing price wouldn’t changing that price decrease profits? dsquared – If the value of the product changes, goes up, why can’t the landlord set a higher price and pass at least the entire cost along to the consumer? (Unless you have rent control) If the value of the product doesn’t impact the price the landlord uses to maximize profit what is stopping the landlord from making up the difference by reducing other amenities not covered by the law? Like repair time waits or landscaping etc? Point out some way the market might not be perfect. Lack of perfect information always seems to work. Assume some level of monopoly price control. Back up your claim with a few anecdotes. Prescribe government regulation. It is a recipe for endless government regulation. The opposite might also be true. But as a starting point for a market with 1,000s or more sellers an assumption of competition seems to be the more reasonable starting point.

By: dsquared

dsquared — Fri, 20 Aug 2004 13:13:45 +0000

Brian (and Alex). You’re resting your case that the laws make the tenant worse off on something like the following preference ordering for tenants: (Strong tenant negotiating power, no laws) > (Strong tenant negotiating power, laws). What I’m saying is that: (Strong tenant negotiating power, laws) > (Weak tenant negotiating power, laws) => (Weak tenant negotiating power, no laws) And noting that (Strong tenant negotiating power, no laws) is not an equilibrium of the game. If (no laws), then (Weak tenant negotiating power). Therefore the best outcome that the tenant can actually achieve is (strong negotiating power, laws), and any superiority of Brian’s hypothetical case 1 (or case 3, I really don’t give a damn) is irrelevant. Alex: As far as I can see, your case would not work if one assumed that the landlord was a monopolist. A monopolist sets his prices according to the marginal revenue curve, not the marginal cost curve. Thus a law which required him to provide costly goods would not change his price unless it priced him out of the market altogether.

By: Kimmitt

Kimmitt — Fri, 20 Aug 2004 05:14:14 +0000

…under the (absurd) assumptions that hot water costs as much as given and that the tenant values it as little as given, and not taking externalities or transaction costs into account.