Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Applying Chicago Price Theory In Academia and Government

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Applying Chicago Price Theory In Academia and Government · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> Jon Hartley: Welcome to the capitalism and freedom of the 21st Century podcast,
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where we talk about economics, markets and public policy.
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I'm John Hartley, your host.
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Today I'm joined by Casey Mulligan,
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professor of economics at the University of Chicago's Department of Economics.
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It's a real treat to have Casey here.
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He is an expert in many areas of economics and
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is perhaps one of the most famous advocates of Chicago price theory,
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something he'll get into in a little bit.
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He's also written many fantastic academic economics paper in so
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many areas of economics.
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We're so excited to have him on the podcast today.
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>> Casey Mulligan: Good, John.
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I like capitalism and freedom.
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I teach a class on socialism, so
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I kind of appreciate what the alternative is as well.
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>> Jon Hartley: Well, we're really excited to have you here, and
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I know you appreciate Friedman along with I think,
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many listeners here, along with myself.
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And part why, which of course his famous 1962 book has given this podcast its name.
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And a big part of the goal of this podcast is to think about how maybe
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Milton Friedman would have thought about things in the 21st century and
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also to maybe question what Friedman argued in much of the 20th century,
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maybe rethink some of those arguments.
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I wanna start by getting into your story and talk about how you got interested
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in economics from the time you were an undergrad to when you came to
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the University of Chicago as a graduate student and then as a professor.
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What began this lifelong passion and interest in economics?
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>> Casey Mulligan: I actually was a math major when I was a freshman,
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and the math professors didn't treat me that well.
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They weren't mean or
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anything, but they had other interests other than their undergraduates.
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And I had this other class called economics.
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Marty Feldstein was the professor of that, and
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even though he was obviously an important person,
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had President Reagan's attention, but he still showed a lot of
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interest in my learning and my career as well as my classmates.
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I thought maybe I should stick with this guy's class and what he's doing.
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And I grew to really like it.
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>> Jon Hartley: That's fascinating.
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I know Marty Feldstein has had so many students over the years and
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certainly was well known as sort of the inventor of
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public economics and a certain approach to economics,
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things like elasticity of taxable income.
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I think a lot of these things really go back to Marty.
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So I'm not surprised that he was a big influence on you and
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a big part of the beginning of your career.
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I think for many who have taught act ten over the decades,
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whether it's Marty Feldstein or Greg Mankiw or Jason Furman,
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now I think act ten has influenced so many people,
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whether they've chosen to become economics or economists or not.
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There's I think a very long history there, and fantastic to learn that.
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Casey, you are part of that history.
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So I want to flash forward to the University of Chicago here.
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You've written a book titled Chicago Prize Theory on this very topic.
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And often whenever this topic of Chicago price theory comes up,
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there's always this question of what is Chicago price theory?
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How does it differ from standard graduate microeconomics?
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Often, I think most students outside of the University of
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Chicago learn their graduate microeconomics from MWG or
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Maskol Winston Green, which is sort of the number one best selling
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microeconomics graduate textbook of the past 30 years.
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But those graduate students at the University of Chicago have to take this
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thing called price theory, which I think in part, certainly Milton Friedman
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played a substantial role in teaching one quarter of that class,
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I believe, along with Gary Becker and others over the years in that period.
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Could you explain to the audience what Chicago price theory is?
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>> Casey Mulligan: Yes, we really the course dates back over 100 years.
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Viner taught it in the 30s.
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As you said, Malton Friedman had an important role teaching it,
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Al Harberger, Becker and Murphy.
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And it's very implied.
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It's not viewed as a mathematical exercise.
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Our intention is not to teach somebody how to construct a mathematical proof.
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We may encounter some proofs, but this is part of understanding the applications.
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I mean, real world questions, what's happening to labor share over time
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would be an example, or what are the consequences of a corporate income tax?
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And so it has that applied orientation, and
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you can read Viner's course from 100 years ago,
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and you'll see that same emphasis.
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The price theories emphasize markets,
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lots of people together, we get away from.
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The alternative approach would be more emphasis on strategic interactions,
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small groups, monopoly, oligopoly, more the game, theoretic emphasis on strategy.
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Look at auction theory.
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I mean in principle, auction theory can be very general and include lots of things.
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But in practice, there's just a good that comes from heaven and
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needs to be auctioned off.
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And there's a few bidders who are there, and we think about how they interact.
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In price theory, that would not be our emphasis at all.
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We want to know where does the good come from?
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What does it cost to make it?
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What are these substitutes in terms of resources for
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making that good on the consumer side?
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What are they doing with that good?
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What are their alternatives?
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So we have really more of a market emphasis.
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We would not ever assume a fixed number of bidders on a good.
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There's a whole population of people who might purchase
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the good if it had the right properties and the right price.
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Chicago, if there's the price theory part,
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a lot of what I said could describe price theory more generally.
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The Chicago part would be also an emphasis on.
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On competition, partly for intellectual reasons,
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that when we look at a competitive market, maybe simplifies things,
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so we can focus on some other complexities that might be quite important.
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Complexities on the technology side, maybe on the preference side.
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So if you had, say, the Becker and Murphy rational addiction analysis,
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they didn't spend a lot of time looking at oligopoly in that paper.
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It's not that you can't have an oligopoly for an addictive good,
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but the dynamics and the stock formation and habit formation,
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they wanted to focus on that, so they did in a competitive framework.
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And we kind of do that over and over again.
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We have some chapters that deal with imperfect competition and monopoly, but
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really, emphasis is on taste and technology, especially technology.
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Such an interesting topic.
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It changes a lot.
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So that would be our emphasis, you know, as a result of these differences.
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One thing you'll see in a price theory book, including ours,
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you can see discussion of price controls, price regulations, MWG, 1000 pages,
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dealing with all kind of issues.
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Price controls is nowhere.
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And as you know, John, you worked on Capitol Hill,
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price controls is everywhere in policy.
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So it's a bit scary to me that we have so many people trained in economics,
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microeconomics, and aren't trained in price controls, and
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then they end up in Washington doing the price controls.
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And that would be an example of a big difference between micro and
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price theory in practice.
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>> Jon Hartley: Absolutely, and I think it's interesting, too, that there's,
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in many respects, I think a lot of these models don't actually involve
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utility functions, and that's sort of a bane of certain undergraduates.
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But it really just starts with the sort of concept of supply and demand,
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things that I think people can agree on, generally speaking,
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in building really simple models.
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Which I think is a big part of the Chicago tradition, and
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it's also an honor that I've had to go to the Chicago Price Theory Summer Camp.
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Something that is broadly open to graduate PhD students to go and
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to learn from yourself, from Kevin Murphy, and
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others who are also passionate about the Chicago Price Theory approach in learning.
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Really interesting applications of Chicago Price Theory,
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whether it's thinking about the supply and demand for oil,
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or housing, or many other topics.
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I know you have a paper out recently on opioid markets and opioid deaths.
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So there's a number of applications, I think, to economics and
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social economics and many different fields anywhere, I guess,
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where you have sort of simple supply and demand frameworks.
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And so it's really interesting and a treat for myself to get to know and
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to work through some of those problems in your book as well.
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And I think certainly, Chicago Price Theory is something that I think people
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who are interested in that sort of simple Chicago approach might wanna check out.
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And I know you have an upcoming revised edition of your book,
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Chicago Price Theory, as well, which you've co-authored with Robbie Minton,
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Sonia Jaffe, and Kevin Murphy as well.
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Something that people should check out when it comes out.
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Certainly wanting to fast forward here a little bit to your time in
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government with the Council of Economic Advisors during the Trump admin,
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you also wrote a book about your experience called You're Hired.
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I'm curious, what was this experience like?
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Having been an economist, professor at the University of Chicago,
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famed economics department for many years, and then going to government,
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going to Washington, and serving in the White House in the Council of
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Economic Advisors, what was that experience like?
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And as an economist, what did you find to be most interesting?
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And I guess, do people in government actually
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think about economics the right way, in your mind?
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Or many people not thinking about incentives the way they should be.
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>> Casey Mulligan: Well, intellectually,
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it's very similar to my job as a Chicago professor.
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Now, the students were not 21 years old, they were maybe older, but
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it did a lot of the same things.
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Actually, the Chicago Price theory was published while I was there,
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and I had the page proof on my desk, and I use them every day.
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One thing, when you're working in the White House, the president is the head of
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a massive organization, too massive, but he's head of a massive organization.
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He's dealing with a multiple fire hoses of information and
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questions and issues, and so are his staff, like us.
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And what a valuable thing to have price theory as a tool
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to organize all that stuff.
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So we could actually swallow all that water that the fire
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was putting out because we had the price theory to digest it.
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So I was really applying price theory.
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I think I actually made a bibliography of 65 or
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67 different things we put out in one year,
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where we used Chicago Price Theory and show which pages we used.
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And the people in the White House loved it.
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I mean, we're happy that we were able to be so productive.
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They started to recognize patterns that maybe these health regulation
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issues are not so different than energy regulation issues,
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labor regulation issues.
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So that part was very similar.
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Now I had to wear a suit and tie.
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That's something I never do on a university campus.
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Had a beautiful office, I had a view of the White House.
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So the kind of superficial things were pretty different.
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The pay was low, but intellectually, it felt quite similar.
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Another difference would be the president himself.
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He's good at publicity, you might have noticed that.
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He knows how to get millions of people to pay attention, and
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he loved what we were doing.
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So he was always bringing attention, 100x,
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1000 time x attention to our findings than we would ever be used to on our own.
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We put things on his Twitter, things like, well, the drug CPI has fallen for
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the first time in 46 years, and that's got to do with deregulation.
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You know, regulation raises prices,
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deregulation lowers prices, things like that.
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He made millions of people see the results.
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So it was very exciting time for me.
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It's part of the reason I wrote the book, to try to share that with people and
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also remember all the things that happened in a short period of time.
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>> Jon Hartley: That's fantastic to hear that you had such a good and
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positive experience working in DC.
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And I know that not every economist that serves on CEA or
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goes to DC walks away with a similar sort of experience.
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Sometimes it's hard to get things done.
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But I'm glad to hear, I remember seeing some of these series that you had put
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together of sort of the CPI sub components that have to do with drug prices and
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how they've fallen over this sort of period of drag.
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And I think around 2018, and I know there's now, I think,
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been changes too, in terms of whether the government's being allowed to
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actually negotiate with Medicare prices.
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And it seems like there's a lot going on too,
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just I think with widespread use of greater use of generics.
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I think that that maybe was a big part of that 2018 story, I guess, here.
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Just also thinking about, we have a lot of younger people and
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younger economists who are listening and are thinking about advice.
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Whether it's thinking about doing interesting research or
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doing research that informs policymakers.
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Certainly a lot of your research is very policy relevant.
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And I'm sure that we also have a lot of listeners who are in Washington,
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DC and working in Capitol Hill or elsewhere in DC.
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I'm curious, what would be your advice to a younger self or
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to younger economists in terms of finding issues that
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are interesting to apply an economic perspective to.
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Or things that you think are not well studied or not well examined yet
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I feel like you've worked on so many different issues that you'd be
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a perfect person to give advice to somebody who's younger.
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And I'm also curious too, in terms of how people should think
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about their careers and what sorts of things they want.
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Some sort of a career in economics, whether that's in academia or policy.
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What are some basic things that you recommend people do and
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trying to establish a brand of some form.
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>> Casey Mulligan: You get your diploma and hopefully the learning's not over.
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That's primary career advice that I would give and many people would have given.
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I heard Stephen Wolfram put it, he calls it a stack, and he's a computer guy.
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Maybe he's thinking about the insides of a computer, but
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he likes to think of his own career that way,
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that every year he was doing something that he could build on the next year.
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And so he's thinking of building up a stack.
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And in our profession, we call that human capital.
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But the advice is the same.
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You're learning things, you're gaining skills.
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And if you're in a position where you can use what you learned next year and
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next year you build things, you can use the next year.
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That I think is a great road to success.
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And I do get a little concerned about some of the younger people
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they're jumping around.
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Part of you want to jumping around to find what you're good at and that I understand,
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but some of the kind of empirical approaches in our profession are like.
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Well, I just happen to run across this data set, so I'll work on it and
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then I'll be done, and the next year I'll be on to something else.
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And you're not building a stack.
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And I worry what position you'll be in middle age and
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older age if you haven't built a sec.
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So while it seemed like I've worked on a lot of different issues, but
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in fact there was a set of basic skills, price theory that I was developing,
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technological capabilities, econometric capabilities.
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So most of those projects made me better at the next one,
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even though it might appear as a broader topic that there's not a close relation.
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>> Jon Hartley: Fantastic, and are there any, I know you're close
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with quite a few very famous economists in the Chicago
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tradition, whether it's from Gary Becker,
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Milton Friedman, many others who are still there.
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Are there any particular like Gary Becker or
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Milton Friedman stories or pieces of advice or
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things that you remember about them that were particularly interesting.
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Or worth remembering in your mind or
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that influenced you in your journey as an economist?
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>> Casey Mulligan: Well, I think I was influenced by Friedman, and
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Becker was, too, in many ways.
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But one common influence that we felt actually going to the title of your
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podcast, capitalism and freedom.
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When Milton wrote that those were kind of based
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on economic theory, an economic way of thinking.
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And the policies that came out were considered completely radical hey,
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let's not have the post office have a monopoly on delivering packages.
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Hey, let's have an all volunteer military.
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Let's flatten the income tax.
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These are considered completely radical, politically infeasible, and
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it was kind of waste of time.
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And that was published, I think, in 1962 and within just a few years,
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these things started to happen.
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And we got a FedEx that was allowed.
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We got deregulation of airlines.
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We got an all volunteer army in 1973.
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And Becker and myself, it kind of encourages us to
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kind of stick with the theory and don't be an amateur political scientist and
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say I'm not gonna work on this because this policy is politically infeasible.
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The politics can change the taste and the technology and supply and demand.
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That basic logic is not gonna change.
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An example that Becker gave, a personal example he gave,
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there was around the draft again.
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Becker himself wrote a draft, a paper about the draft and
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its problems and why an all volunteer system would be better.
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And he didn't send it in for publication because he thought it was just impossible.
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Within a dozen years of him throwing that in his drawer,
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it became possible he was kicking himself.
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And I had a similar instance in my own career where I was working
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on teaching public economics and thinking about government
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programs that are in kind rather than paying money.
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And one of the things economic theory says you can't really
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have an in kind program if you can resell the things.
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So you can understand Medicare has hospital visits and doctor visits.
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You can't really resell your hospital bed that easily.
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So it kind of works.
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But at the time, this was the 90s.
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The Senate and
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the House were talking about having a adding drugs to the Medicare.
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We're like, wait a second, drugs you can resell,
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your hospital bed you can't resell, but drugs you can resell.
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Grandmas are gonna turn into drug dealers.
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And I thought no one in Washington is going to listen to me about that.
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In fact, no one in academia is gonna listen to me if I'm going to say grandmas
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are gonna become drug dealers.
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And so I dropped it and
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I really regret doing that because the economics was very clear.
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And what happened?
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Within a few years, we got Medicare part D, and
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immediately you had a few grandmothers, not many, but in high volume,
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were selling drugs that the government was buying for them at a low price.
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And they were turning around selling a high price, and people died from that.
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So things can change.
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What you think is acceptable to talk about in the policy realm or
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in the academic realm can change pretty quickly?
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Makes sense to stick with your principles.
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And Milton did that in the capitalism and freedom.
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>> Jon Hartley: Absolutely, and to think about just how many of these topics are,
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I think, newly relevant again today.
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You're absolutely right how prescient that account was in 1962, capitalism and
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freedom, when only a few decades later we got an all volunteer military in the US.
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And then on top of that things like you also sort of had the,
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I guess, reaganomics sort of revolution where not only reaganomics,
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but I mean, you also had JFK who slashed the top income rate substantially.
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And the top income rate went from, with the JFK and Reagan,
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tax cuts from the top marginal rate was I think close to 90%.
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And was brought all the way down to the 30s where it sort
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of sat in recent decades, we haven't gotten a flat tax.
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Some Eastern European countries did end up getting
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flat taxes after the fall of the USSR.
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And a number of people like Bob hall and others, I think,
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were influential in promoting flat taxes and certainly in countries that sort of
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didn't have maybe great institutions and great rule of law.
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And perhaps it made a lot more sense also in places like Hong Kong, for example,
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where flat tax has been successful.
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I'm curious about your thoughts about the future here and
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the legacy of capitalism and freedom.
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There's a lot of topics that were written in that book that sort
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of have a lot of renewed interests right now,
25:43
whether I think occupational licensing is very much a topic of interest right now.
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Scholars like Morris Kleiner have been working on it for decades, but
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I feel like now quite a few scholars are interested in this topic.
25:56
And then you also have other things like income share agreements and the whole
26:00
challenge of rising costs of going to college, which have become astronomical.
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And thinking that maybe there's better approaches than simply a fixed rate
26:09
student debt that's being subsidized by the federal government.
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Income share agreements in recent years were sort of thought of
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this potential solution to mitigate that issue and
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have sort of better incentives on both the part of the student.
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And maybe having better accountability in the sense that there's
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sort of an aligned incentive to find majors that maybe have better outcomes.
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And of course, this was all before the sort of blanket student
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forgiveness that occurred last summer.
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But I'm curious, what do you think about the legacy of capitalism and
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freedom in the 21st century?
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Obviously the discipline has moved quite a bit, I think,
26:52
away from Friedman in some respects, but I'm curious about his ideas back then.
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And do you think that they're sort of newly relevant today?
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And if so, how and in what areas do you think they might be relevant again?
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>> Casey Mulligan: Milton Friedman wrote me a couple letters.
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One of them, I'm remembering now about my paper.
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And he said, Casey, you're politically naive.
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The economics is fine, but you're politically naive.
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Now, I think back, it kind of cracks me up, because actually he was projecting
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a little bit that he was maybe a little politically naive.
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His view, especially earlier in his career when he wrote that book, was,
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if he can just educate enough people about economics that we can change policy.
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And a more Stiglerian view after George Stigler would be,
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no, we have these policies, so called mistakes.
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There's a reason for that, it's a political equilibrium of some kind.
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And it's not a matter of a lack of economic education or
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people's incentive not to acquire that education, let's say.
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And this was kind of a intellectual battle within our department.
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And I think Friedman, a lot of it rubbed off on Friedman, although he still,
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at the very end, still appreciated economic education.
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And so it's not zero weight on that, but still.
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And so I think what you see in some of the things in capitalism and freedom,
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they were successful because their economic gains were high.
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But it also wasn't a political equilibrium to stay with a kind of a flat tax.
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And so loopholes got introduced again, especially after the 1986 reform.
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And I think even later in his life,
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Friedman wrote some Wall Street Journal saying,
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a lot of the politicians have a lot of interest
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to poke holes in the flat tax in order to be important and
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to get their constituents attention.
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I think that's partly why you see a pendulum swinging,
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that the political equilibrium with our current institutions is not total freedom.
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And you get in periods where the lack of freedom is too costly and we move in
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the direction of more freedom, but again, that's not a permanent equilibrium.
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So we move back toward the less freedom.
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That's kind of the way I think about it and
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kind of follows Milton's own intellectual history.
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>> Jon Hartley: So such a fascinating point.
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And I think more about things like school vouchers and charter schools,
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which are also very much a big topic today in educational reform circles.
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There are so
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many issues that Milton Friedman talked about that I think are newly relevant.
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And perhaps all the more reason to turn back to some of these older ideas,
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which may be newly relevant again.
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And all the more reason to pull out not only Milton Friedman's Old Price Theory
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textbook, but also your Chicago Price Theory textbook,
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which, again, a revised version, is coming out soon.
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Thank you so much, Casey, for joining us today.
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This is the capitalism and freedom in the 21st century podcast where we talk about
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economics, markets, and public policy.
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I'm John Harley, your host.
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Our guest today was Casey Mulligan,
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a professor of economics at the University of Chicago's department of economics.
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Thank you so much for joining us.
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