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  • Adriene: Hi, I'm Adriene Hill -

  • Jacob: And I'm Jacob Clifford, and this is Crash Course Economics. Today we're gonna talk about a lot of stuff.

  • Adriene: Everything from blundering planned economies to heartless free markets from price

  • gougers to indolent apparatchiks. But it's not all bad news. We're going to learn that

  • price signals indicate skinny jeans are on the way out.

  • [Theme Music]

  • Adriene: We've talked about the difference between free market economies, where supply

  • and demand determine what gets produced, and centrally planned economies, where government

  • agencies decide what gets produced. Today we're gonna expand on that, and discuss why

  • competitive markets have been more successful at providing most of the things people want.

  • Central planning has some upsides. Everyone who wants a job has a job, and production

  • aims to meet an idealized version of society's collective goals. But the reality of it has

  • been less ideal for consumers in those societies.

  • In the Soviet Union, central planners were focused on producing heavy equipment and military

  • hardware. There were shortages of consumer goods, like soap, sugar and electronics. It

  • turns out that people care more about smartphones and good coffee than they care about tractors.

  • And so countries like China and Cuba have moved away from large-scale central planning.

  • Jacob: The problem with central planning is that it's inefficient. Now, when economists

  • talk about efficiency, they're talking about a couple different types of efficiency that's

  • different than the efficiency that you might know.

  • The first is productive efficiency: the idea that products are being made at their lowest

  • possible cost. This means that there are no wasted resources and that raw materials, workers,

  • and machines are being used to their fullest potential.

  • Central planners in general, aren't that focused on cost. But in the free market an individual

  • business owner has an incentive not to be wasteful because they want to maximize profit.

  • In the words of Milton Friedman; "Nobody spends somebody else's money as carefully as he spends his own."

  • The second type of efficiency is called allocative efficiency This means that the things we're

  • producing are the things that consumers actually want. In other words, our scarce resources

  • are being allocated towards the things we value.

  • Let's say a company is producing only skinny jeans, now if they're not hiring too many

  • workers and if they're not ending up with a bunch of extra materials they're producing

  • at the lowest possible cost and that's productively efficient. The problem is they only make skinny

  • jeans. Even though the company might be productively efficient they're probably not allocatively

  • efficient. Consumers don't want only skinny jeans some want boot cuts. Central planners

  • are less likely to be allocatively efficient because they have a harder feedback about what people want.

  • Adriene: Free market producers of consumer goods collect a lot of data about consumer

  • preferences through stuff like market research. But they can also learn a lot about consumer's

  • wants by looking at prices. Economists call these price signals. Let's go to the Thought Bubble.

  • Okay, if people are paying high prices for skinny jeans, it tells producers "Society

  • wants more skinny jeans, start making them." If no one wants skinny jeans, producers start

  • making something else instead.

  • Here's another example: tablet computers weren't really popular until apple introduced the

  • iPad. After that, boom! The market exploded. In fact, I know about 11% of you are watching

  • this video on a tablet right now. Because I can see you. And I can't believe you're still wearing skinny jeans.

  • When Google, Samsung, and Microsoft saw Apple selling millions of iPads at $500 and up,

  • they had an incentive to jump into the market. Price signals not only tell producers what

  • to make, but they also help distribute tablets to the people that value them the most.

  • For example: if someone's grandma doesn't really want a tablet and she was only willing

  • to pay $20 for one, she doesn't get it. Unless her grandkids drag her into the 21st century,

  • by giving her one for Christmas. Some economists love price signals so much that they argue

  • against the tradition of giving gifts. This argument was popularized by economist Joel

  • Waldfogel who argued that gift giving is inefficient. From a macroeconomic point of view, holiday

  • shopping boosts consumer spending, GDP, and employment. But, if too many people are purchasing

  • items that the end consumers don't value, then resources are being wasted.

  • Of course, this analysis doesn't factor in other implicit benefits of gift giving Like

  • fostering love and affection among family and friends. But the fact remains: The ideal

  • gift in terms of efficiency is cash. Heart-warming cash.

  • Thanks Thought Bubble. Theoretically, in a free market, producers cannot make themselves

  • better off without making consumers better off. If a company makes too many units of

  • a product or just undesirable stuff, They'll have to adapt quickly, or else it will go

  • out of business. Competition between businesses keeps prices and quality up. This is our old

  • buddy Adam Smith's invisible hand.

  • It's important to take a step back here and point out that we're not saying that free

  • markets are always good and that government involvement is always bad. Most economists

  • recognize that markets aren't perfect and they often fail to meet society's needs. In

  • these cases, economists encourage the government to either regulate or take direct control

  • of markets to improve social welfare.

  • In the United States, which is often mistaken for a free market economy, it turns out just

  • about everything is regulated. For example, FDA regulations reject any wheat that contains

  • nine milligrams or more rodent excreta pellets and/or pellet fragments per kilogram. And

  • the government directly controls the markets for national defense and public education.

  • The field of public economics analyzes this very thing.

  • Now I love rodent excrement and public education as much as the next girl But let's get back

  • to markets and the role that prices play in determining how we use our limited resources.

  • So price signals help us use our resources efficiently, but that doesn't mean that everyone

  • agrees that they are always right or just. Take price gouging.

  • Price gouging happens when sellers raise prices for essential items like food, water, or gasoline.

  • When there's something like an emergency. Some argue that this practice exploits consumers

  • and as an example of the cruelty of markets. In the US, anti-price gouging laws have been

  • enacted in 34 states. But many economists say that these laws promote inefficiency and

  • actually make the problem worse. They argue that allowing prices to increase in times

  • of crisis encourages others outside the disaster zone to haul in and sell essential goods.

  • If prices aren't allowed to increase, then there's less of an incentive to bring this

  • stuff in. Furthermore, higher prices for things like batteries, sleeping bags, and generators

  • mean that people who don't really need them won't buy them, making them more available

  • to people who do. Now it might not always be government laws that limit price gouging.

  • It may be the desire to earn profit that actually keeps prices down.

  • It's clear that businesses can earn a ton of profit in the short run by price gouging,

  • but what happens in the long run? Consumers are likely to remember how they were treated.

  • This is part of the reason some businesses like Walmart has an emergency operation center

  • and an in-house meteorologist to interpret weather patterns. This allows them to have

  • goods like water and batteries and stock when they're needed.

  • Not only is this profitable, it's also a pretty good public relations move. In fact, in some

  • cases like Hurricane Katrina in 2005, private businesses were quicker to provide disaster

  • relief than government agencies. A different example of how the price system is perceived

  • as unjust is below-cost pricing. Sometimes called predatory pricing. This is the idea

  • that a business can drive out competitors by charging lower prices even at a short term

  • loss. Competitors that can't sustain such low prices will be forced out of the market,

  • giving the surviving businesses market share and the ability to raise prices.

  • Let's talk about Walmart again. Walmart has been the target of numerous predatory pricing

  • lawsuits. Their size allows them to squeeze distributors and sell products at very low

  • prices. Although lots of consumers like these low prices, it's bad for competitors. Especially

  • small mom and pop stores, who are sometimes pushed out of the market. But is it predatory pricing?

  • In the US, the courts have said it's not. the federal trade commission's website states,

  • "Although the FTC exampines claims of predatory pricing carefully, courts, including the Supreme

  • Court, have been skeptical of such claims." So predatory pricing lawsuits are common,

  • but very rarely successful in the US. In Germany, Walmart faced the same sort of accusations

  • in 2000 and was ordered to raise some of its prices. The company ended up leaving Germany in 2006.

  • Predatory pricing is difficult and risky. When a business successfully eliminates their

  • competitors by selling products at a loss, they're eventually gonna need to increase

  • their prices above the market price to make up for those losses. In the short run, consumers

  • would have to pay more. But eventually, other businesses would be attracted by the higher

  • prices and enter the market. The end result is that there's no guarantee that predatory

  • pricing is worth it in the long run.

  • Jacob: There's tons of examples of corporate greed, inequality, and disregard for the environment

  • that make people wonder if markets are evil. And they are. Thanks for watching! We'll see

  • you next week! [endscreen music plays, stops] Now, there are some examples of socially conscious

  • companies that make an effort to protect the environment and help the disadvantaged.

  • Capitalism, with its focus on prices rather than fairness is often characterized as the

  • opposite of altruism. But the two can, and do coexist. But here's the big takeaway: Capitalism,

  • with its system of price signals, is basically crowdfunding. We collectively choose what

  • we want and how we want it made when we spend our money. After all, companies can't force

  • you to buy their stuff, they have to earn your money. Now if you want to see real changes

  • in the world, don't just complain that corporations are greedy; expect more from them.

  • You also need to expect more from ourselves. If you disagree with the way a retailer treats

  • its workers, then don't buy from them. Even if they do have the lowest prices and convenient delivery options

  • Adriene: If we as consumers want our purchases to have a positive impact, it's on us to seek

  • out companies that try to improve the world. This might mean paying more for the stuff

  • we buy or it might mean buying less stuff. A market based society still has shared social

  • goals. They just don't come from a central planner. Sure, some of our social priorities

  • come from governments, but they also come from each of us and the decisions we make

  • about how to spend our time, and energy, and money.

  • It's also worth remembering that it's a luxury to have these discussions. For many, many

  • people around the world who live in poverty and have trouble affording the basic necessities of

  • life, paying a higher price, based on conscience isn't an option. Thanks for watching! We'll see you next week.

  • Crash Course Economics is made with the help of all these fine people You can support Crash

  • Course at Patreon, a voluntary subscription service where your support helps keeps Crash

  • Course free for everyone forever. And you get great rewards! Thanks for watching and DFTBA.

Adriene: Hi, I'm Adriene Hill -

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