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OK, everyone. OK, everyone, this is NPR. Phones down. Eyes forward. Hello and welcome to Planet Money Summer School. Sweetest course in economics since that failed lemonade stand has a kid. This is class number two, markets and pickles. I'm Robert Smith. Every Wednesday to Labor Day, we are meeting here in your ears to learn the essential principles of econ one to one. And if you pay attention and pass our final exam, we will put your name on a summer school diploma that lawyers tell me is in no way to be considered a diploma.
Hopefully you've spent the last week after Class One thinking like an economist waving your hand at past decisions and saying sunk costs. Get behind me. Today, we're going to hear about how markets pop up in the most unlikely places.
Those are the most exciting places. Can't wait to get looking for them.
Listening. Along with us, our professors extraordinaire from the University of Michigan, Justin Wolfers and Betsey Stevenson. Hey.
Hey. Hi. Good to be here.
Today's show is about how individuals with very different needs and priorities get what they want. Through the magic of markets and in a market, there is this constant dance between supply and demand. If you know one thing about econ, it is probably this. There is an equilibrium, a price where the supply of a product or service meets the demand for that product or service. And I know we promised no charts and graphs for summer school, but just this once, we're going to do an audio chart with our voices.
Justin, Justin will be supply, which goes up as the price increases.
And what you heard there was the excitement that I have as a producer when there's a really high price. That excitement leads me to want to produce more and more that supply Betsy to the demand that he's giving me.
Glen says, you know, I have AP, HD.
So prices are going up. And as the prices are going up, the demand is falling.
And so if supply goes up more and demand goes down. Mm hmm. There's some note where they both meet and they hold that note.
All right. I want everyone to keep that note of market balance in your mind as we listen to a story every week on summer school, we're going to play you part of an episode that we found in our archives. And then afterwards, we're gonna get back together with our economists and discuss the economic theories behind it. Today, we'd like you to listen to a story of a market that was out of balance. No one was getting what they wanted until someone figured out how to reorganize.
It was originally on our feedback in 2015, and it was called The Pickle Problem posted by Jacob Goldstein and Stacey Vanek Smith. It's about 16 minutes long and we will meet you back right here after it's done.
About 10 years ago, Suzanna Morgan was running a food bank in Alaska, and she really needed fresh produce. She always did. One day the phone rang. It was this big national charity called Feeding America.
Feeding America is this network of food banks all around the country, including Susanna's. And what they do is they get these big donations of food and they figure out where they should go on this call. They said they had a big donation for her. It was not fresh produce. It was a truckload of five gallon buckets of pickles.
You're kidding me. You're offering me pickles. And the Feeding America prisoners said, Yeah, I know, I know, I know. But you guys have been hanging out there at the top of the list for quite a while. And this is the first thing we've had that we think will really make it all the way to Alaska.
And what did you do with them?
We strongarmed every soup kitchen we could find into taking the gold.
Susanna would ask the people from Feeding America, why aren't we getting more fresh produce?
Feeding America would say, well, we didn't offer you that truckload of oranges out of California because we thought they transportation be too expensive.
And I would say that Skream there. That's because Susanna had set up her own transportation system so that if Feeding America had offered her fresh fruits or vegetables, she could get them trucked to Alaska really cheaply. But the people at the Feeding America Home Office didn't know that.
And a lot of food banks had this problem when food bank director in Idaho, my home state, complained that he got a truckload of potatoes. I mean, come on, it's Idaho. Of course, he already had a warehouse full of potatoes that had been donated by local farmers.
This system had real consequences for hungry people all over the country. It meant that people in Alaska were not getting fresh produce. We're not getting, say, potatoes. And at the same time, the food bank in Idaho had too many potatoes and not enough other stuff.
Everybody knew this was a problem, but for a long time they just lived with it. And then Susanna says a new CEO came into Feeding America.
And as usual, what happens when you bring in a pair of fresh eyes? They look at something and say, I can't imagine why you guys are living with that system. That sucks.
Hello and welcome to Planet Money. I'm Jacob Goldstein. And I'm Stacey Vanek-Smith. Today on the show, how a bunch of food bank directors, including at least one socialist, tried to figure out a better way to get food to hungry people.
Their bold experiment, the free market sort of free anyway. Definitely a market. This message comes from NPR sponsor. Western Governors University W.G. EU offers online bachelor's and master's degrees in business, I.T. education and nursing. Their innovative, competency based learning model was designed specifically to fit the lives of busy adults with AWG you. You can move through the material you already know and spend time learning what you don't. Which means the faster you demonstrate what you know, the faster you finish.
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We discussed the reckoning overrates taking place in newsrooms across the country. Listen and subscribe now to it's been a minute from NPR. That bold experiment happened about 10 years ago. The new CEO started gathering together a group of people, some from headquarters, food bank directors from around the country, including Susanna Morgan from Alaska.
Also a few economists from the University of Chicago, Susanna and the other food bank directors start flying to Chicago every few months, sitting down in a room and talking about their own version of the pickle problem. And pretty soon, Susanna says, they get to the heart of it. It is a problem for someone else to make decisions for you, right? It is a problem with somebody else is trying to decide whether this is something you need or not.
When they don't know what's in your inventory, they don't know what your local donation supply is. They don't know what donated transportation you've arranged for or what your fundraising is at the moment.
So to have a central office trying to make those decisions far away from those sources of knowledge led to all sorts of mismatches.
When the economists in the room heard Susanna and her colleagues lay out the problem this way, they got very excited. Susanna remembers one economist in particular named Canice Prendergast.
Once we were able to to lay it out in those clear terms than than Kansas from the University of Chicago was able to say, well, sounds like an economic problem to me.
There is this phrase in economics, the local knowledge problem, and it's why is centrally planned economies don't work very well, no matter how smart the people in control are, whether they're in headquarters or the capital or the castle or whatever, they just don't have the knowledge to decide whether the people, you know, out in Alaska should get pickles or oranges. And when I talk to Kansas, the economist who was in the room with Suzanne and the others, he told me the clear answer to the local knowledge problem is a market, a place where buyers and sellers come together because the beauty of a market and in particular the beauty of prices is they show you how much different people are.
In this case, different food banks value different things.
But Khanna says that roomful of food bankers was not very excited to hear his pitch for the virtues of the free market.
One of the food bankers, a wonderful guy called John Arnold, came up to me and said, Look, I'm a socialist. I have no interest in this. I listen to you, but I don't think I've any interest in this.
I should mention that John Arnold passed away. But when I ran this quote by Susanna. She said, yeah, I could totally imagine John saying that. And anyway, John was not the only food banker who was wary of the market.
I think many of them have the following sense. Markets are sometimes unfair. It benefits the powerful. It benefits the wealthy. It benefits the strong. Their focus is so much on the others, the ones who've been left behind, left behind by markets, by the open markets.
And their great fear is that whatever we came up with would do the same. And if it did, they would prefer the old system.
The idea of a market just seems fundamentally contrary to the spirit of food banks.
I mean, these are places that give away food for free to hungry people.
And in any case, it wasn't like Feeding America could just sell food to the local food banks. One problem with that is the food banks in poor areas often have the hardest time raising money from local donors. They're in poor areas, so they wouldn't have enough money to buy the food.
So Kansas and the other economist asked the food bankers, what about fake money? What if Feeding America created its own little economy and gave out fake money to all the food banks which they could use to buy the food?
Next question they said was, but how do we how do we make sure the neediest get the most food? To which we said we given the most fake money. And in some sense, maybe that was one of the early breakthrough moments, which was the idea that the poor can actually be wealthier than the rich in fake money and fake money. Exactly.
You could imagine distributing this fake money to the neediest places and then letting them buy, you know, whatever they want out of this National Feeding America system. But you still have to solve all these other problems, you know. What should prices be in this new fake money? How do you let everybody shop in a way that's fair.
So more flights to Chicago, more meetings with the economists. And finally, Kennison, his colleagues came up with the big idea.
Kenneth said, well, how about eBay? How would it work if we set up a system in which all of the food in truckloads that's donated goes on to a technology platform? And the decision as to whether you want it for your food bank is made at the food bank and how much you want it is made by how much you bid on it.
And how did that play in the room? The clouds opened and the angels sang.
No, no. Okay. Maybe it wasn't quite that biblical, but it was literally this this moment in which we just went. We have had a breakthrough.
It was like setting up a whole economy. Fake money prices set by auctions. And with that key twist, the food banks that fed the most hungry people would. Get the most fake money. To see how the system works in real life. I went out to the Community Food Bank of New Jersey last week. They have this huge warehouse out by the Newark Airport, Tristin Wallet.
Give me a tour. Can see some raisins up here. Can Sam. And you've got some grapefruit juice. What else do we have here? We have some tomato sauce.
Tristin says the most recent thing he bought at auction with that fake money for some syrup. The pancake syrup interested me in particular because I know we just bought some pancake mix.
So as a moment when syrup was particularly valuable to you because you were a guy with pancake batter, but no syrup. Exactly.
So at least for now, that means a lot of people in New Jersey can now have syrup with their pancakes or cut up here.
We can head back to the office. The office is a smallish room attached to the warehouse, and it's where Tristin bids in these auctions. We get in there and he opens a browser on his computer logs into the Feeding America system and shows me this morning's auction down at the bottom of the page. There's a number in red. This is like Tristant bank account, a fake money. The money, by the way, has this warm, fuzzy sounding name shares.
What does this say right here?
Yeah, it says available shares at the moment. I have five thousand four hundred and thirty nine shares.
I view it as like monopoly money, except that it has real consequences. Every day. Feeding America gives Tristin some fake money in his bank account. And there's a formula so that the food banks that feed the most people will get the most fake money. Yeah.
On a typical day, Tristant food bank gets a few thousand shares. You can think of it like an allowance and he can treat it like an allowance.
If he wants to spend it everyday on something little, he can do that. If he wants to hoard it and splurge on something big, he can do that, too.
Today, he pulls up the auction on his computer, look through the stuff. There's some Fanta grape soda, some palaeo cheese, and then something catches his eye. It's a truckload of cereal cooking on here.
I can see that there's a lot of corn flakes. There's a little bit of Frosted Flakes on here. There's some Kashi cereal.
It's about 100000 boxes in all. And he says cereal is something people always want and that he doesn't get enough of from his local donors.
He can't actually see how much the other food banks are bidding. And Canice and Susanna and the others, they designed the system this way so that people couldn't just wait until the last second and bid one more fake dollar to get what they wanted. So it's a sealed bid auction. You put a number in and wait. And when the auction is done, you see if you won.
The system does tell Tristin that on average, truckloads of cereal like this one have sold for 4400 shares.
I currently have about 50, 400 shares. So I'm going to bid all of my shares. You're going all in this area? Yeah, I'm going to go all in and even going all in. This is no guarantee that I'll get it.
Tristin types in his bid. Click Submit.
Now it's a waiting game. Crossing fingers and hoping for the best.
I asked Trystan to show me some of the other stuff that sold at auction lately. And he pulled up a bunch of results on his screen.
And what's this one? Pickles. Pickles. What was the price? They put in a bit of minus two thousand.
Minus two thousand for stuff that's really unpopular. Food banks don't want to pay to truck it in and they don't want to find a place to store it. So they can bid negative shares. In other words, they can say, sure, I will take the pickles if you will give me extra fake money. That's what happened with the pickles.
So they won it by saying, yeah, we'll take it off your hands if you pay us. Exactly. A few minutes after Tristin bid on that cereal, this morning's auction is over.
I think the results should be in. If we. I'm nervous. Are you nervous? I'm a little nervous.
Tristin hits refresh. So we lost it. You didn't get it? No. Someone else won this load with eleven thousand five hundred sixty four shares.
The winner bid twice as much as Tristin. Someone in Evansville, Indiana. Drive safely back. Yes, hi, I'm trying to reach John, please. This is him. This is John Strain of the Tri-State Foodbank, proud new owner of 100000 boxes of cereal.
Was there a particular reason right now that you especially wanted cereal?
I just knew that we were down to basically about a half a trailer full of Sherill. And it goes it probably will be gone in the next two weeks.
John actually gets less fake money allowance every day than Tristin, but he'd been saving up for weeks and he was about to run out of cereal.
This food that everybody really wants at the breakfast is supper at midnight. It doesn't matter when you keep cereal, you know, you eat it dry, you eat it with milk, you know, whatever, whatever makes you happy.
He figured it was worth it to go big, spend more than twice the average. And get that cereal.
If Tristin in New Jersey decides that he really needs cereal, he can save up to his own monster bid up the next time more corn flakes come up for auction.
John and Christine are too new to remember much about that old system back when Feeding America just sent people stuff. But it seems like the new system is definitely an improvement. Suzanna Morgan said the auction system meant they could finally get produce at the food bank in Alaska and Kansas. The Economist told me even John Arnold, the socialist from Michigan, even he came around in the end.
He went from being the most skeptical to being somebody who actually thought it was worth doing. What happened?
I think what he realized was the use of this market would give him access to a lot of really cheap food.
So while other food banks were in bidding wars over cereal. John Arnold could swoop in and pick up the stuff that everybody else was ignoring.
And he became what we call the bottom feeders. He was one of these guys who'd log in every morning, see what was cheap, get loads of cash. And his solution was Senshi. The market allows me to get a lot of pounds of food in a way that I did not get before.
And when Kenneth says John would log in and see what was cheap, he, of course, means what was cheap in fake money. And one of the really interesting things that has emerged from this system is just how different prices are in this fake money food bank economy compared to the, you know, real money economy we see at the grocery store.
Like peanut butter is incredibly valuable in the food bank economy. It last forever. It doesn't have to be refrigerated and it is a great source of protein. Also, kids love it. A truckload of peanut butter can cost tens of thousands of shares dairy.
On the other hand, really cheap in the food bank economy. Lots of food banks get local donations of dairy. They often have to move it pretty quickly because it has, you know, short expiration dates. It's harder to store because you have to keep it refrigerated. So up in Michigan, Kenna says John Arnold could buy a lot of dairy. And in the end, John Arnold really helped this system take off all around the country.
He was a very persuasive figure because I think a lot of the other food bank director said, if he's in, I'm in because they thought he was unlikely to be a candidate to go along with this. If the socialist is in on the market system, how bad could it be? Exactly.
There was one part of the new system that did not work out yet.
When Canice and Susanna and the others were in that room creating this new system, they figured food banks should be able to sell food to each other for fake money so that Idaho food bank with all the potatoes could sell them to Susanna in Alaska and get fake money to buy whatever they needed in Idaho. But even though the food bankers are okay with buying stuff for fake money, they don't really want to sell stuff to other food banks. Here's John Strain, who bought the cereal for that food bank in Indiana.
If I'm a food bank and I have extra product, I'm going to share with another food bank. I don't want no extra money, no net, nothing out of it. I've shared with the five different food banks in the last 60 days. I just think you should share what you've got if you've got plenty.
So, OK, food bank directors are fundamentally generous people. It's why they're running food banks. Right? And that is part of the reason this this corner of the market never took off. But Susannah Morgan says there is something else at work. There's something subtler, really, another kind of economy.
This is a network built on relationships.
If you work at a food bank, she says, you need to have friends at other food banks.
You're going to rely on those people for more than just food. You're going to rely on those people for stealing their good fundraising practices. You're going to rely on those people for advertising the positions that you have open. So those people are your best source of of learning and contacts. And you can use food as one of the ways you nurture those relationships.
Suzanne is now running the Oregon Food Bank, and she says she does occasionally use the system to sell food to other food banks, but not often. She says she would much rather just give it away to another food.
That was Stacey Vanek Smith and Jacob Goldstein from 2015. Coming up on Planet Money Summer School, we will take the parable of the pickles and discuss it with our economists. Where do markets work best and when don't markets work at all?
After the break. From Mesan to Becky to Karen, our very own Karen Napat, Karen, Karen Grigsby Bates shares the evolution of the nickname for a certain kind of white woman.
I'm looking forward to the next iteration. I want my name back.
That's coming up on NPR's Code Switch indicator from Planet Money is your source for daily economics news.
All in less than 10 minutes a day. I was in my apartment and I burst into tears. How am I going to make my rent? We are really in crisis. I keep getting the runaround with unemployment. Listen and subscribe to the indicator from NPR. When we see a price tag on a product, we think of it in terms of money. But in the case of the food banks, the price wasn't about money. The price is about information.
It was about communicating who wanted what. And it helped to find a balance between the supply of different types of food and the demand for each product. There was a reason the pickles had a negative price. So now we wanted to spend a few minutes going over the lessons that we learned in the episode with our two resident economist, Justin Wolfers and Betsey Stevenson excited to do it.
Yeah, it's nice to be here. You know, the thing that I loved about this episode was when you initially think of economics and and auctions, you think of competition like there are winners and there are losers. But you realize as you listen to the episode that because everyone wants and needs something different. It's not just about winners and losers. There's an opportunity to create more winners, if you will, to the technical expression for this is economists call this.
Gains from trade. Stuff gets allocated to people who want it most. I'll be honest. I find it kind of magical. All you have to do is change who gets what. And here we do it through markets and we create more. Join the world, literally more joy. Same amount of stuff, more joy. The market is figuring it out as it goes by itself, right. Those aren't the technical terms. It's pretty much what. What are the technical term?
That's pretty much the technical term. So no individual knows how much each person would value each good. So solving who should get what? Create the maximum managed wage. Incredibly heart problem in programming computer. It would take years for the computer to sell, but this is just an immensely difficult thing. But a market is like a big calculator and it can aggregate all of this information and figure out a way by adjusting prices to making sure that each of the goods going to the food banks ends up at the food bank that wants it most.
So what's remarkable is we're looking at one organization, a food bank, and we can see how big the knowledge problem is. No one at the top of the organization has enough information to be able to make good decisions. The top of the organization just doesn't know about the solution that the Alaskan Food Bank has worked out in terms of being able to ship from California. They don't know how many potatoes the Idaho Food Bank already has. They just don't have that much information.
And if we think that's hard to have within an organization. Imagine if you were trying to do that for the entire economy. It's a colossal challenge. And really no one's up to the task.
Well, some people would probably say, well, you just need more computers and more inventory and more A.I. learning and figuring out, you know, who wants what in some sort of database option.
Bottom line is that the information is too dispersed across society for it to be able to be aggregated together into one person. But what we do have in markets is prices and prices plays the role of helping us aggregate that information price tax as a signal.
So if we if we view the food bank market as this elegant solution to the problems of distribution they had, and it it did work beautifully. But but what can go wrong in a market?
Well, there are a number of things that can occur that we call market failures. But perhaps the most relevant one to think about right now is how market power can undermine competitive pressures in a normal market. We can think about a world where we don't have a bunch of different sellers competing with a bunch of different buyers, but perhaps we have only one primary buyer and lots of different sellers. People worry about that in the labor market. What if you're in a small town and Walmart's the only employer that's one buyer and lots and lots of people trying to get a job.
And so you can think who's going to have power in that relationship? Who's going to be able to get a price that benefits them most? Who's going to be able to try to extract as much of the benefits from that relationship as possible? It's going to be the one it has market power. We can think about it on the other side, where perhaps there's one seller in many, many different buyers. Many people have noted that prices on Amazon seem to be going up during the pandemic.
Amazon is a company that seems to have a lot of market power right now. Lots of people are turning to their computers and trying to order from Amazon. So you've got lots and lots of different buyers. Not one seller. There's obviously alternatives, but that's a situation where it's easier for a company to extract higher profits out of their customers.
Justin. Are there places where a market can. Can never work or shouldn't work? I mean, I don't know much about your own family, but you don't distribute love coupons that that are tradable for hugs and and you don't have that sort of market based economy just in your family. Do you? Currently, we don't. There's an S.E.C. investigation at the moment of the snuggle market. And we had to suspend trading in other areas where you should not try and enforce a market solution.
Right. So there are some areas where trust works really, really well. And that's why we do a lot of things in families. And there are some parts of markets where if people don't have trust, they work really, really poorly. Economists call this trust problem an information problem, because what if you know something that I don't? If I don't trust you that you would tell me bad news about the product, then I start to worry. You're trying to sell me a dud.
So to give a really simple example, lots of people end up buying a used car from an aunt and uncle, their parents, a brother or a sister. They do that because they know if it was a really crappy car, they'd probably get told. Whereas when you go down to the local used car lot. I've never met a used car salesman who said, look, the reason this one's cheap is because it's a dud. It's a limit.
And so when one person knows something that the other doesn't and there's not bonds of trust between them, that can really undermine markets, it's a big deal also in health, health insurance and health care markets as well.
Let me give you another situation where people are typically not comfortable with markets, and that's for things where people feel like trading, particularly involving cash, would be repugnant. So we don't have a market for organs. You might need a new kidney, but it's not OK to go and say, hey, you got to I'll give you 30 grand for one day. That market is seen as just morally wrong.
Although, to be clear, a lot of economists think that's a mistake. If we offered people 30 grand for kidneys, we might get more kidneys. So this is delicate dance between economics and ethics here.
But but those are places where, you know, there are real ethical concerns about people who would think, you know, my I got to put food on the table for my kids and I own the market for my labor. Is it working out very well? Maybe I should start selling off a kidney. That is a reason why there's lots of markets that we have tried to say, you know, we're just not comfortable with this.
The technical term is icky, icky. That's going to be one of our vocabulary words for the day. Icky as well as the phrase local knowledge problem where people at the top of an organization don't know what's happening down at the bottom. And the phrase gains from trade, which Justin used, where if you allow people to voluntarily trade, everyone can get happier. There's more joy in the world. So one thing we want to do each week is to give you the summer school student and assignments of you can think about during the week about applying these lessons to your life.
Just did my assignment for summer school. Take a look at an organization that you really admire and ask yourself, is it organized? More like the way Fitty America used to be organized with a centralized planner making decisions that affect the rest of the organization, possibly based on incomplete information? Or is it organized more like Feeding America was after reorganized around markets where power left, the executive office instead was devolved to individual decision makers to buy and sell in markets. And then once you've thought which of those two models your organization fits in, trying to imagine what it would look like the other way and ask yourself whether it could be more effective if it reorganized the other way.
OK, listen. You have your assignment and let's take a look at the syllabus. We will be back next Wednesday with a class where we consider price elasticity and barriers to entry. By talking to a drug dealer. Thank you, Justin. Betty. It's gonna be so fun next week to let us know what you came up with from our assignment this week.
Remember, it was taken organization, maybe one where you work and imagine how it would work better if you reorganized it with more or less central decision making.
And then you should send that idea to your boss and to us. Your Planet Money where Planet Money at NPR. Or you can find us on Facebook, Instagram, Twitter. And we are doing special TEQ talks on the Tick Tock app, reinforcing the economic lessons from summer school. You can find us there at Planet Money. Today's cost was produced by Lauren Hodges with help from James Snead, Darian Woods. Alexi Horowitz Ghazi. Nick Fountain and Litsa Yagur.
Sound design from Isaac Rodrigues. The show was edited by Alex Goldmark. Betsey Stevenson and Justin Wolfers are professors of economics and public policy at the University of Michigan. And later this summer, they will debut a new audio course. It's called Think Like an Economist, and you can find it on the Himalaya. All right, everyone. Do your homework. Study for the test. I'm Robert Smith. This is NPR. Thanks for listening.