0:36 Intro. [Recording date: June 13, 2011.] Mike in Erlangen, Germany to give talk; one of the largest beer festivals going on. What a shame! You don't drink beer. I've been going as an anthropologist, not to drink, to observe the natives in their typical habitat. In a more serious vein, what is the nature of a beer festival there? What does that mean, exactly? In this case, six breweries, kellers, which have stored beer inside the mountain. Bergkirchweih, the opening of the mountain church. What they seem to mean by mountain church is the beer cellars. Spring, it's warm enough; all of the beer that has been chilling is now ready to be served. A lot of days there are 100,000 people here, sitting in big, outdoor pavilions, tables, singing really cheesy American songs. Sounds fun. I know you don't really like beer--have you sampled any of it? I've done extensive field work. And what's your verdict? More research is needed and I think government funding. Do they ship the good beer out? Or is there some pretty good beer left behind? There's pretty fine beer left behind. It is nice to have it locally brewed, Old in the United States is 50 years. Some of these kellers have been operating since the 14th century. Has anybody accosted you about your recent stardom in the rap video "Turn of the Century"? I have been getting some love about that. Are you pretty anonymous, still? Can you move about freely? On the street I have not had any difficulty moving about freely.

3:06 Our topic for today is the nature of exchange, and some of our feelings about it and some of the work you've been doing, thinking in some depth relative to what economists usually do in this area. What issues have you been interested in? I have to say, this kind of draws together about 4 or 5 different EconTalk podcasts, so the basis for this is thinking that you and I have tried to do on several different shows where we asked questions. A lot of times the answers seem pretty easy, but then when you think about it, you think: Well, why is that true? As you may remember, several EconTalk podcasts ago, we talked about price gouging--about the ice in Raleigh that was sold at a price that was higher than was allowed, and so the police came and took the ice. And people actually clapped because they were glad that that high price wasn't going to be charged. Even though they weren't going to get any ice. That was bad, it was important--it's hard to say just what they were thinking. Ticket scalping: Why is it that we have laws against reselling? The common theme in all of this that I've been interested in is there are some transactions--I can't have nuclear weapons, nuclear material that's really dangerous; I can't have a machine gun. There are all sorts of things that I can't own. I can't own heroin. But there are other transactions where it is fine for me to have it. In fact, it's fine for me to have and exchange it. I just can't exchange it for what it's worth. The only reason we have that law is to make sure we cannot exchange it for what it is worth. I can give ice away. That wouldn't have been a problem. The problem is they were charging its market price. And what do these different examples have in common--perhaps? I have a thesis, I have a claim; and that is this has happened to you. I know it's happened to me, to anyone who has thought about economics. You end up saying: Well, if exchange is voluntary, what's the problem? And the person you are talking to may be someone from a different field who hasn't studied economics and who says: Well, it's not really voluntary. In their mind, there's a difference between voluntary and really voluntary, and that's what my research lately has been on. And I came up with a new word. If you google it, you'll actually find me and only me. Let's hope it's the start of a trend. And that word is? Euvoluntary--e, u, and then the word voluntary. And it looks like your spell-checker is going to change that to voluntary. Why did you choose that coinage? Well, voluntary is the one that we are arguing about; and the Greek prefix eu means well or truly. So, there are some insects that are social, that kind of gather together and do things together. But there is a whole other class of insects that are truly social. Eusocial insects are like ants are like bees, and it's really not even clear you really can say they are separate organisms or a super-organism. I wanted something that is super-voluntary, really, really voluntary. And here's my thesis. I don't know if it's revolutionary, but I want to try it. The reason is: Euvoluntary exchange is always just. No one can ever object, and the State would never have an excuse to regulate, euvoluntary exchange. So, it must be that all the regulations we have, and in fact all the moral intuition about exchange is that: Well, that's not really voluntary. Two things that come to mind. The first is Voltaire, in Candide, where Candide talks about the best of all possible worlds and he's usually invoking--and making fun of economists, actually--voluntary exchange. So, given a choice--I read the book a long time ago--but given a choice between running a gauntlet where people are going to slap you with unpleasant things and having your head lopped off, you choose running the gauntlet. And isn't that glorious, because you were free to choose and you chose the gauntlet. So you are better off. And you are in some dimension. But economists--to go back to what you said before--we are really into what we call mutually beneficial exchange. And usually what that means is that if it's voluntary, it must be mutually beneficial. If you chose to enter into that transaction, it must make each party better off who is party to the transaction. And that's all you need to know. We have a subjective sense of what's right and wrong. So, the very fact that you did it voluntarily means that it must have been beneficial. So, what's wrong with that? Give me some examples that jar non-economists' sensibilities and let's talk about them. We already gave one, but I think it's important. Let me make it a little bit simpler. Suppose I have a wallet and you have a gun. Now, you have a wallet and gun. Because I voluntarily gave you my wallet. I decided it's better to give him the wallet than to get shot. Now, in many senses, that's voluntary. Now, it takes, it assumes, there's a distribution of power or income, let's say, that is not protected by property rights. It's only protected by force. But I might make voluntary choices in a regime without enforceable property rights. So, economists start first of all with some underlying things they are going to assume happen by sort of a context that provide background for exchange. And one of those is property rights. You can't just take something from me by threatening force. Whenever we say something is voluntary, we are ruling out all of the Voltaire example. We are ruling out the guy with the gun and the guy with the wallet. But even then, there are a lot of things we think are not voluntary. The biggest example, the one almost everybody agrees about is blackmail. Or organ sales.

9:48 So, let's start with blackmail. I know that you've been drinking in Germany. And my wife must not find this out! After we finish this podcast, I say: Mike, if you don't send me $10 a week for the next two years, I'm going to send your wife a copy of this call. Most people would say that's repulsive and horrible. Not unrelated to various views we have on privacy, which some people argue: Well, the only reason people want privacy is to hide inappropriate things, and if you do something inappropriate, it should be public. If, Mike, you knew I could blackmail in advance of your trip to Germany, maybe you wouldn't tell me; and maybe you wouldn't go drinking, because someone else there might see you, take a picture. You'd be in trouble with your wife. So the blackmail is actually a good thing. That would be some argument--a stupid argument in my opinion. That's a possibility, that blackmail might actually enhance. But let's suppose you didn't say anything about the $10; all you did was call my wife: I think Mike has a drinking problem, he's been drinking in Germany. No one would complain. There's nothing wrong with the transaction. The problem is charging for it. And why is that? You are allowed to exchange. In fact, you can do that--people might say it is admirable and you are honest. I'm not so sure about that in this particular case. But in many cases, it might be repulsive, might be a violation of privacy; but it clearly does not violate the law. Unless you charge for it. That's correct. So, your point is that it's an interesting thing that my incentive to profit is not allowed to legally take place. But suppose at the last moment, before you called my wife, you said: You know, I sort of feel bad about this; if I were to get $10 it would make me feel better. And goodness sakes--Mike would much rather pay the $10 than deal with his angry wife. It would be a bargain. So, compared to what you are about to do, that's better. I'm doing you a favor, by charging you. And you are charging less than in fact I would pay. Correct. So why don't we allow that? Because it's not euvoluntary. It's voluntary in a sense, but it's not euvoluntary. In a moment I'll give the definition. It isn't very complicated. But it has a part that most of the time economists leave out. I'm trying to build a bridge between economists and philosophers. Nice idea. Narrow bridge, I'm sure. It's a long bridge, I don't know how long; and there are no railings; people keep falling off. One of those bridges with vines and slats; you plunge through the slats. What's below that bridge? I would get in trouble even for answering that question. There be monsters.

13:12 So, one way to think about it--my first thought: It's not much of a choice when there is only one alternative and it stinks. That would be one way to frame it. That's basically the entire intuition. It's more complicated than that, but that's basically the entire intuition. On the other hand, if you have a choice--I think we can probably find some transactions like that. But what about organ sales? What I like about this theory of euvoluntary exchange is it unites all f these different kinds of transactions that appear to be illegal for different reasons. I think they are all illegal for the same reason. So, I am a struggling person, trying to support my family, and I want to sell my kidney. I cannot legally sell my kidney in the United States. Why not? You read an ad, and it says you need to match a particular DNA profile. You go and you get tested, and it turns out that that's you. That's your blood type, your DNA profile. You are free to donate your kidney. There is no problem with the transaction. You just can't get paid for it. And then you think about it: Well, I'm giving up my kidney. So, there's a person who, maybe they have insurance, maybe they have a whole bit of money--I know I'd pay a whole lot of money for my son if he was dying of renal failure. Sure. I'd pay a million dollars. I'd find a way. So, that person, were I to offer them, they'd said: Yeah, I'll do it. But since the law says it has to be free, well, maybe he doesn't do it. My son doesn't get a kidney, and he dies. This guy doesn't get a way out of his financial problems. But the transaction is fine. There is no problem giving the kidney. So, how is that analogous? I'm not sure that's true in America, by the way. I'm not sure you can earmark a kidney now. But it's certainly of a different nature than the problem of the selling of kidneys. Well, I chose my example kind of carefully. I said we were asking for a particular blood type for one person who was about to die; and let's suppose we could agree. In fact, the reason I chose it--and I started my talk here in Germany with this example--you may have seen this, and we'll put a link to it on the website: A young man in China decided he wanted a new iPad. Didn't have much money and so he went down to the hospital and sold his kidney. He got $3000. Came home with a new iPad and a laptop computer. His Mom asked him where he got the money. He was kind of sleepy; she wasn't happy. Right. So, why is that like blackmail? I have information, it's mine. In the blackmail case, there's no problem with your giving it to my wife. She wants it. But there is a transaction that makes both of us better off instead of that bad thing; and that transaction is outlawed. But there is no problem with your giving the underlying commodity. You just can't charge for it. It's exactly the same with a kidney. I could give the kidney, but I can't charge for it. And, the fact that I can't charge for it makes something worse happen because the exchange is not consummated. Everyone is worse off.

17:07 There would be two ways of thinking about why these are outlawed. One would be some sort of efficiency/meta-efficiency. Something simple, like: We think this is bad, and we don't want there to be very much of it; and we know that if we allow these market transactions there would be more of it than there otherwise would be. Okay? So, we think it's bad for blackmail, but we don't think it's bad that people have organ transplants. It doesn't really work so well there. So, the second argument would be--and I think these are the casual intuitions, and I want you to try to give me the definitions and try to unify them--the second argument would be there is something morally repulsive about bringing money into a bodily transaction, an organ transaction. It's undignified; it ruins human dignity. They don't go together. We want to keep these outside the commercial sphere. The question is why. Of course, we sell our time, our labor--which is clearly something bodily. But I think most people just go "yuck." Economists go "great; we need more kidneys donated, so let's create an incentive." Most people say they'd rather there be fewer kidneys but that they not be sold. There is also an idea in the back of the mind somewhat like that blackmail is bad--you just shouldn't do it--and donating kidneys is good--and you should just do it. And the fact that the monetary incentive could create more of that I think disturbs people. They wish the world weren't that way; they'd rather have a legal ban on it and let's cheer people on to do the right thing without the money, and we'll try harder that way. But that's not your argument. That's the sort of argument I've always encountered, and I found it unsatisfying because--the ice example. Some guys came in to sell ice in Raleigh. They were free to give it away. And most people think you shouldn't take advantage of other people's misfortune, so they should have given the ice away. Of course, the problem was you'd need an awful lot of people to come and give ice away to mitigate the problem. The only possible answer is if you are allowed to sell it, a lot of people might come. But because there is an anti-gouging law, they don't. So, you are free to donate the ice; you just can't charge for it. That means the transaction doesn't take place; and the result is, on its face, that people seem to be worse off. Well, here's what I think the problem is, and that is that we have the idea that exchange that is not truly voluntary should be restricted by the state. And you really put your finger on something important. But I think it's a confusion that I've only just recently started to understand. So, the original example, about the guy who was going to sell his kidney--let's suppose his daughter needs $20,000 for some medicine or else she is going to be very sick. But if he sells his kidney, he can get the $20,000 and he can get the medicine. Well, we think that's not right; he shouldn't have to do that. But then, we take another step and say: We're going to outlaw it. Well, that in no way addresses the problem. It actually makes him worse off. But we have this sense that that transaction is wrong. What we are really objecting to is the underlying, pre-existing distribution of wealth and power. That's why euvoluntary exchange is an important concept. So, I want to say truly voluntary--or euvoluntary--exchange is always just. What if exchange is not euvoluntary? It violates a moral intuition that many people have. Maybe it should be illegal; but even then, exchange that is not euvoluntary often helps those who are least well off. Only people who are desperate are the ones who would try to engage in that kind of not-euvoluntary exchange. Well, I've used the word a bunch of times; I should define it. First, for exchange to be truly voluntary, we need the common law conditions for contracts. You have to be of age, you have to be competent; you have to be informed--so there is no fraud, so I am not selling you a car and there is no engine. Have to have a convention of ownership and a convention of transfer of ownership, so we all know what that means and all agree about it. Second, and this is a strong condition, but there is no later regret. I can't make a mistake; there can't be a problem with time-consistency. You've seen me, Russ--I'm a large man. Sometimes when I buy a donut I think: why did I do that? If I drink too much beer; if I'm a heroin addict. If it's something I do but then later think that was wrong, that's not euvoluntary because there is some compulsion or mistake that I've made. Interesting. Large, and donuts--I don't think that really captures the issue. Well, I said heroin addict. The donut thing pulled me up short for a minute. You are of a large frame. I'm big boned. I would not say you look like, say, Wimpy in the Popeye cartoons. I appreciate that, Russ. I've always appreciated you and I don't say it enough. Carry on. Third, no externalities. Obviously, if I do something in a transaction that affects someone else without their permission, it can't be euvoluntary. So, all of the participants and those affected have to have given their consent. Or be irrelevant because they are not affected. Because the effect is zero. Instead of zero it could just be negligible. If I smoke a cigarette in the next county, maybe you really care about second-hand smoke, but there is a threshold. Fourth, no duress or force saying that you must act or pay. So, I can't be holding a gun to your head because that's obviously not euvoluntary. Here's the new condition: those are probably things we would have had before. Except for the regret, which I think is pretty interesting. Well, I added that because people want to say there are compulsions, there is advertising. I wanted--an exercise in question-begging--let's put a wall around the things we all agree, even philosophers, who hate markets, everyone would agree that it's voluntary. I didn't mean to say philosophers all of whom hate markets. Even someone who has deep questions about markets would agree that this is really voluntary. Can't help mentioning Elizabeth Taylor, who passed away recently: How many times was she married to Richard Burton? It was more than once. They got together and separated a couple of times; I think they were formally married and remarried two or three times. Would you call that euvoluntary? Obviously they had some regret at some point, and decided to end it; but came back anyway. That would be sort of a compulsion, perhaps. You are interested in this regret thing. I think the challenge of imagining how you will feel in the future. It's a rational expectations condition. It's voluntary in the sense that I'm really, really informed, not just common law level of informed. Okay; and now the new condition. It's not that big a deal. Up at the beer festival I think they are playing bad American singalong songs. Terrible sign of homogenization. You'd think they'd be polkaing and singing German beer songs. "Sweet Caroline." All night; nightmare. Red Sox fans everywhere rejoice. Become a Red Sox anthem.

25:41 BATNAs. Sounds like the kind of thing cut open by Luke Skywalker. Spell it. B-a-t-n-a. It's an acronym. Best Alternative to a Negotiated Agreement. A transaction is not euvoluntary if the disparity in BATNAs is too great. All a BATNA is--some people at the Kennedy School of Government came up with this idea--because you need to capture how much I need access to the transaction. So, it's my next best alternative. If I'm going to a grocery store and I have my cart and I think I need some water; I look and bottles of water are on sale for $1000/bottle. I just laugh. I assume it's mismarked or that's just stupid. I go to another grocery store and I get them for $.99, like always. So, my best alternative to a negotiated agreement in that store is I spend five more minutes and I get it for $.99. That's fine. But suppose that I have in my pocket $5000; I've gotten lost and I'm wandering in a desert; and I see like a vision coming over the hill Tony's Taco Truck, with a sign on the side that says: Today's special, three tacos for $5 and there is a drink special--one bottle of water for $1000, or three bottles for $2500. I say: Tony, what are you doing? I'm dying of thirst here! Even better is he sees you and then he changes the sign. He's decided somehow what to charge and it is based on the conditions. There's no question: when he's in town he charges a different price than when he's roaming the desert who just might be running out of water. So, he's clearly trying to take advantage of my desperate position, if he finds someone like me. So, he asks: You have the money, right? Yes, I do, in fact. But I don't want to have to pay that. All right; he starts the car. Wait! Tony, all right; I'll have the three for $2500, please. And throw in some tacos. That's not euvoluntary, because the disparity in BATNAs is enormous. For me, not having access to that exchange means that I will die of thirst. For him, it's a little bit of money; but he goes back to the city, and it doesn't change very much. So, power in economics is an enormous disparity in BATNAs. And that happens any time when you have monopoly power. But we worry about it not so much if you have monopoly power--I don't care that much that I can only buy iTunes from Apple--because there are some other things. If I only care about iTunes, I'm stuck. But my BATNA, best alternative, is I'm not going to die. I'll get my music somewhere else. In the case of Tony's Taco Truck, when I'm in the desert, the disparity in BATNAs is enormous. And I'm arguing that it's that disparity in BATNAs that makes us say those transactions should be outlawed. Let me just ask a technical question. I'm a little confused about the acronym. So, best alternative to a negotiated agreement. What does that mean? Between the two of us. You are trying to negotiate an agreement. So, the best alternative I have to the three for $2500 is death. And that stinks. Of course, the economist in me says: But he's wandering the desert in a truck; he's got a lot of expenses. It could be that his margin is quite low. Right? It could be he's barely profiting from this. But even in that situation, you are suggesting, and I think a lot of people would agree, especially non-economists: there's something alarming, disturbing, uncomfortable about that. It's not euvoluntary. Now, there's no way it should be illegal. But it probably would be, which means he isn't out there in the first place, and I die. So, just like the ice--the fact that we make the transaction illegal means that there isn't any of it, because you don't get the response. In all these cases, whenever we talk as economists and non-economists about these sort of situations--I'm going to challenge you with a couple of examples in a minute where I have encountered these kinds of conversation--when you confront the person who wants these transactions to be illegal with the fact, which he'll often accept, that you are going to make the people involved worse off, I think the usual reaction is: I don't care. Even though they care about the person, because they are making it illegal; they don't care about the person because, as I said before about the organ donation, they want to live in a world that is not a bad world to live in. It's a world I'd want to live in, maybe even be happy in that world, where people "do the right thing" voluntarily without the monetary incentive. You think about somebody--a car gets stuck in a ditch on a snowy night; and someone comes along to push them out, and they person whose car is pushed out of the ditch offers them money. This is really voluntary, in technical terms. There's no hold-up, no exploitation; the person didn't say I'll push your car out if you give me $20; does it voluntarily, and as he turns to leave, the person in the car says: Here's $20 for your trouble and time. A lot of times, I think the person who pushes the car out would be insulted and would reject the money. Angrily. At least start friendly, but eventually angrily; and would do that regardless of their income. Even if it were a rich person whose Lexus was stuck in the snow and poor person in a beat up car who pushes them out, I think there would be a lot of cases where they'd turn the money down. Now, one argument would be: Does it matter how much money it is? If it was $1000, would the person still say no? And I think the answer would be he'd still say no. And part of it would be because--I don't know if this has anything to do with your argument--it's simply not the deal I got myself in for. I'm going to do this because it's the right thing to do. And it's not a tip; I don't want a tip. If I push your car out, and if I'm poor and disheveled and you are rich and comfortable, in a tuxedo in your Lexus on your way to a fancy dinner and I'm struggling to get home after my work day, and I push you out of the ditch and you offer me a $100 bill; I probably would refuse it. But if you offered me a bottle of wine or some other acknowledgment or you sent me something as a gift, later I'd say thank you. I do think there is something to this argument that the monetary aspect is part of the story. That's what I wanted to come back to. We start out, we want to regulate things that are not euvoluntary; but even if you point out it might have made them better off, people will say: I don't care. This shouldn't be about money. That's why the people clapped when the police arrested the ice sellers. They weren't confused; they knew they weren't going to get ice now. They just don't want to live in a world where people can profit from exploiting other people. When you bring money into a situation that's an emergency, that sort of monetary incentive is not what should motivate people's actions, in their opinion. I want to credit that argument. I think that's a widely held opinion. I just want to say that it only happens in situations where the exchange is not euvoluntary. The guy stuck in the ditch is in trouble. For me to pass him by would be bad; but for me to do it for money is even worse.

34:51 That's what's interesting. Why we as economists find that puzzling is puzzling, given how widespread the alternative view is. I would go so far as to say you need to think of it as a preference. That's right. Let me give you a couple of examples. What about someone who works at Wal-mart, who is often viewed, I think by some, not by me, as exploited. Do you think someone who works at Wal-mart, is that a euvoluntary decision? It is not because their BATNA, because their best alternative to a negotiated exchange is unemployment. I would extend beyond Wal-mart to sweatshops in the Third World. Some people think of Walmart as being a U.S. sweatshop, though I think that's quite unfair. But people who work in sweatshops, it's not euvoluntary. Often, when economists say: They're better off working in a sweatshop, the other person will say: I don't care. What the mean is, it's not euvoluntary; that person doesn't really have choices so you can't say it's voluntary. Their betna, the disparity of betnas is too large. This large corporation is able to take advantage of what Marx called the reserve army of the unemployed. There are thousands and thousands of people who need some kind of little job; they don't have many alternatives. I'm going to challenge that. I'm just saying that's what they believe. First of all, I make more than the minimum wage at Wal-mart; I make $9 or $10 an hour. I switched to sweatshops. I'm a Walmart employee; I make $10 an hour. I can make $10 an hour in a lot of places. Maybe $9.50. Just like the sweatshop. The multinational corporation in a poor nation often pays a lot more than the alternatives. Why they do that doesn't make sense actually, so maybe that's not true. But why is that a BATNA situation? Why is there a disparity of BATNAs? My best alternative is a job similar to Walmart. Where is the disparity there? People believe that, like the organ donor, is the only way you would work at Wal-mart is if you just have no other alternative. Then they say: We don't want you to be that restricted. Like the father who was going to sell his kidney: You shouldn't be in such a desperate position. So, the claim is that's the only reason you would work at Wal-mart. But again, I could have alternatives like it. You'd have to generalize and say the only reason I'd work at a place like that. The problem I have with that is I think a lot of people who work at Walmart are proud and happy and cheerful. That would be very different from the seller of the kidney. A lot of the people who object to Wal-mart have never been to Wal-mart. They've been academics all their life; they can't imagine having a real job--how degrading that must be! I have very little sympathy with the argument for Walmart. I think it does work better--no one is suggesting we should outlaw jobs at Wal-mart. They do. They make it hard for Wal-mart to come to their area. The problem I have with that general argument is it's usually a response to union pressure and propaganda, which is encouraging people to feel that way about Wal-mart, whether it's actually true or not. Self-interested propagandists spread a hatred for Wal-mart. There might be a legitimate reason to hate them, but the main reason I think a lot of people accept that view that Wal-mart is exploitive is they've been told that's the case; but they are told that by people who are actually self-interested, who are profiting from the fact that Wal-mart isn't around. The other kinds of transactions, like for organ sales, or to a lesser extent to working in a sweatshop where we would want to outlaw it--the claim, and I'm pretty convinced of this; I think I can document it, though I'd have to change the language a little bit--what people are saying is that if you don't have any alternatives, we should outlaw it. That's basically the same as saying it's a disparity in betnas. I think there's something to that. Let me tell you a story. I don't think I've told it on the program before, but it's a story I tell a lot when I speak because it's so illuminating to me. I once taught a group of social-work graduate students economics. This was at Washington University in St. Louis. Very good social work school, I think number 1 or 2 in the country in terms of ranking. These students came to me and said: We are taught economics in our social work classes, but we have a feeling we are getting a particular viewpoint and we'd be interested in something else. What they meant is they were getting something Marxist or close to Marxist, and they wanted something market oriented. They chose me, which is flattering. I made a deal with them that they would not pay me and I would not give them any grades. It was just a voluntary, a euvoluntary, exchange. Metaphorically, their car was in the ditch. Well, that's true. I don't know if I pushed them out. But I thought it would be an interesting experience to teach without anything being at stake except just the knowledge. I said we'll do it three or four meetings, and if we both think it's enjoyable we'll extend it. We'll commit to a certain number. We did and we continued; and it was a very illuminating experience for me; I hope for them as well. But one of the students in the class told me a story I found fascinating and that relates to what we've been talking about. She had been visiting in Nepal, and she had clothes that needed cleaning; and she found out she could hire a washer woman to do your clothes for you. No washing machine or laundromats where she was. So, she went to hire someone and the wage was so appallingly low--let's say it was ten cents an hour--she was so horrified that she decided not to hire this woman. It would be exploitative. I said: You've exploited her by not exploiting her. Maybe she'll only find something much worse. Maybe she'll take it voluntarily, not euvoluntarily. She was looking for work. Maybe she had a hungry child or needed money for medical care; she was desperate enough to work for ten cents and hour; and the student refused to engage in this transaction allegedly because she cared about the woman. As an economist this is very difficult to understand. The more I thought about it, the more I understood it. When I tell this story to my students, one of the reactions is always: She should have paid her more. Then you ask the question: How much more? American minimum wage? American living wage? And if you offered her $10 an hour instead of ten cents an hour, what would her reaction be? Would she be thrilled? Offended? Where would the line form when the word got out that you were paying 100 times the going rate. There'd be a giant rent-seeking contest. How would you deal with that. I put myself in my student's shoes and tried to think about why you could come to that conclusion and feel good about it. It's the disparity in betnas. Right, exactly. This is a student who was going to come back to American life, earn an extraordinarily large income by Third World standards and perhaps even a decent income by Western standards, and certainly compared to this woman. The gap between their wellbeing was so large over a lifetime that this was simply an unimaginable transaction. It's as if that transaction is inherently exploitative, not because of the features of the transaction, but because of the disparity in betnas. Because both people clearly could be made better off? Why wouldn't you joyfully engage in this transaction? She couldn't do it. The punchline to the story is that she did her own laundry, threw out her shoulder, and ended up hiring the woman anyway eventually.

44:37 The personal experience that I had like this was I was once house sitting for someone while I was in Santiago, Chile, working at a think tank there the summer between years in graduate school. And it turned out that with the house there was a cook. So, I came home the first day I was house sitting and I put my feet up on the coffee table to read the newspaper, and a woman comes out of the kitchen and asks me in Spanish what I'd like for dinner. And I said: What do you mean? And she informed me she was the cook and was going to make whatever I wanted. And I was extremely uncomfortable with this; I said: Well, make whatever you feel like. And she was extremely uncomfortable. So we eventually came to some conclusion about what she was going to cook, and she's in the kitchen cooking and I'm in the living room reading and I realize this is making me very uncomfortable. This woman is cooking for me who I'm only implicitly paying. She was being paid, but only a small amount. I went into the kitchen to chat with her, which totally violated the social norms; she was very uncomfortable. We proceeded to have an awkward conversation in very bad Spanish. I asked what music she liked; she liked Frank Sinatra and Julio Iglesias. I came to like Frank Sinatra. It's painful to hear this. The next part was the more interesting part. I thought, sports is something people have in common; I asked her what her favorite football, soccer team. She rooted for Colo Colo, which is what the poor people in Santiago rooted for. You could see that coming. And of course, all my friends rooted for Universidad de Chile. And I have to mention--what I loved about soccer in Chile, when my friends told me that was their favorite team I asked how it was tied to the University of Chile. They said: Well, there isn't one. I said: What do you mean? They said: They just use the name of the school. I thought how nice, because in America we pretend that the people with the name of that team are associated with the school--in fact, they are kind of like employees, unpaid employees in college. But here they actually totally sever the connection. The Duke University basketball team could be, like, the Celtics. But anyway, I realized again the disparity in our lifetime situations was just inherently uncomfortable. I did not like this woman cooking for me. You felt you were exploiting her somehow. Right, and I was trying to soften that by chatting with her. As if that was going to help. Oh good, he came in to chat with me--is he going to grab me? Not just that. I don't think that was the worry. First, I violated the social norm that I'm trying to make conversation with her, and two, my conversation is not very good; all it does is enhance the feeling that I'm the Universidad de Chile fan and she's the Colo Colo fan. It was a total failure. I would have much preferred that she would not cook for me. I didn't want her there. I didn't want her to do that. Maybe even to the extent of if they had offered, you wouldn't have fired her, but if you said--maybe they'll give her a sabbatical, we'll give her the month off. And they wouldn't have paid her. I would have said: Great! My question is: how much would you have paid to avoid having to deal with that, with that sense of exploitation? The answer is some. Maybe even up to the point of saying: Lay her off for a month. Even though you wish her no ill. Correct. It was an uncomfortable experience. It gave me an insight into my student, when I thought back on it. I think it's really no more complicated than that--just having such a big disparity in life situation. And in particular, if some of my life situation is contingent on the consummation of this contract. That explains why all of these different transactions are illegal, why all of these different situations we feel bad about if not formally illegal. Maybe it's not a transaction, but a sort of social relationship. Great example.

49:19 What kind of reaction have you gotten to this idea? Once I explain it--the problem is, once I explain it, people say: Oh, that's simple. And it is. But I wanted to be able to give some economic intuition to it. But very positive. The first article is coming out in a month in a philosophy journal, and then I have two other papers coming out in philosophy journals about it. Philosophers, at least, think it's a useful concept. Now, here's the problem. I want to say that all euvoluntary exchanges are just. And someone asked me: Aren't you minutely analyzing the contents of an empty box? There are no euvoluntary exchanges. Well, maybe that's true, but there are some things that are pretty close. And thinking about it in those terms--I think is still helpful in understanding people's reaction. I think the interesting question is: How many only semi-voluntary transactions will you tolerate? When you consider all the incentives and other effects down the road. I really am drawn to this idea that people--including myself--have romantic ideals about how the world should work even if it doesn't work that way, and are not so eager to put into law or practice some of the realities. They'd prefer to imagine a world where people are motivated by non-monetary incentives to do the right thing. The reason I wrote this paper is exactly the core of it. They prefer that and they can continue to prefer it after I point out that it makes no economic sense. Used to be, I thought, that I would be the great bringer of wisdom. Once you make your argument: All my life I was wrong; it changed my view. That does not happen. What they say instead is: I don't want to live in that kind of world. I don't like you. Sometimes they are not always very defensive: That may be true; I don't care. I'm going to persist in this belief because I find it uncomfortable to have transactions like that monetized and be so important. So, here's where I think it gets a little trickier; and where maybe there's room here for some compromise. I think about my grandfather on my father's side, who dropped out of school in 6th grade--probably around 1910--because he can't afford to go to school. His family probably needs the money. My son asked me: What did he do? The answer is: I have no idea. He scrapped on the streets somehow. Never finished anything beyond 6th grade, and became a peddler after a number of unsuccessful careers. Probably somewhere along by the age of 30 or so, he sold stuff door-to-door to poor people in Memphis, TN, who couldn't get credit; and he gave them credit. And this is before--in the 1930s and 1940s, before the major department stores came around, before there was layaway. Unless people think he was loaning money, which he was not; he was giving credit in the sense that he would give goods and they would pay later. Correct. And they paid a lot. He had, an implicitly--I'm sure--large rate of interest. Many of them didn't complete the payments. He'd have to threaten to take the goods back, which he hated, of course; and it was always a threat. Didn't do him any good; wasn't sellable as collateral. That's a pretty tough life. I'm sure he got beat up sometimes; I'm sure there was stuff that happened to him that was really unpleasant. And certainly it was not a very easy life. But it allowed his family to get by. And my father became the first person in his family, I think, to go to college. And his son--that's me. And I have a very, very, very different life than my grandfather. I think my grandfather is pretty happy with that deal. At the time it wasn't fun. But it was part of a dynamic set of incentives that, in a growing economy, allow people and their kids--I'm thinking about immigrants now who come to America. The immigrant story. My grandfather was born in Philadelphia, but it didn't matter. It's the same story. They come to America; they do something very unpleasant, many times doing two or three jobs doing unpleasant stuff, often at a much lower set of activities than their skill set. My grandfather knew Shakespeare by heart; he loved poetry; he would have made an interesting college professor. Instead he had a pretty tough life. But he took care of his family. And his family, because he did that in America, it turned out had a different set of circumstances than he did. Do we really want to make that hard for him? Do we really want to make it hard for immigrants to come to America, do menial things at low wages that are unpleasant to make better lives for their children and grandchildren, even though at the point in time when it's happening we might be a little uncomfortable with it? The answer is: it shouldn't be that hard in the first place. Meaning? It just shouldn't be that hard in the first place. People who have this sense of what he did was not euvoluntary--it shouldn't have been that hard in the first place. The state or someone should provide an ability to make sure that education and other things are provided. He shouldn't have had to work so hard. Oh, I see. So, we should have helped him avoid those choices. The guy in India who has to sell his kidney to help his daughter--he shouldn't have to be in that position. We should make sure he has access to medicine. It's a false dichotomy to say: Should we allow this person to make a choice that makes him better off or not. They want to choose C, and that means take away the starkness of the choice in the first place. The problem is: That's not actually what's being proposed. The only thing that's being asked is: Is this transaction going to be allowed? Is your grandfather--maybe there's a Yiddish word for rag-picker. That's not what he was, but suppose someone's going to be a rag-picker, which is they pick through rags and resell it so it could be made into sort of musty clothing. The question is: Should we outlaw that profession because it's undignified? Well, that's the only question that's being put to you. Not: Do we restructure the entire society so that no one is in that position in the first place? But is that the difference--and by the way, the Yiddish word for rag is "schmatta," very good word--but the schmatta trade, it doesn't really refer to people who are going through rags. It refers to people in the clothing and textile business, called the rag business, the schmatta trade. I really think that's the bottom line here, comes back to my earlier point: What kind of world do you want to live in? Imagine a different world in which those choices would not be possible; they want to make the choices outlawed. It's a non-sequitur. So, you have mandatory education; so my grandfather in 1910 shouldn't have been allowed, as some would argue, to drop out of school because that's a bad thing. They should be forced to stay in school even though their family is going to be hungrier, maybe even desperately hungry; and we need to create a world where that person doesn't have to work at 12 years old. I think the economists's answer is: We don't know how to create that world; in 1910 we didn't know how. And the economist would say B: and you make it worse, by outlawing that activity, by saying that you can't. That you think it shouldn't have to, it's a mistake to then go and say: Then you can't. Those are different things. What do you think the philosophers would say? Do many of them talk about these things? Yes. And they agree that it is an important point, that that distinction is a useful one. It's a small distinction, but a useful one. Though, what I want to argue is: Euvoluntary exchange is always just; there are relatively few euvoluntary exchanges and they are uncontroversial because no one worries about them. What about exchanges where the exchange is not euvoluntary? Understanding that that's what we are worried about may help us diagnose where those kinds of transactions actually should be allowed. Because in many circumstances, that's the only thing that the desperate person can do to better their lot in life and maybe have a better life for their children. Tough one.