Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

other information related to today's conversation. Our email address is mail at econtalk.org. We'd

love to hear from you. Today is November 14th, 2011, and my guest is Michael Munger. Michael,

welcome back to econtalk. It's my favorite thing, Russ, thanks for having me on. You're my favorite guest.

I'm your buddy. I love you more. Your turn. Okay. Our topic for today is profits, and you want to

use three stories that you've chosen to illustrate the role of profit in there or get us started.

Well, I'm going to start with a joke because it's never a bad thing to do that. This is a joke that I

think most economists tell most introeconomic students, and yet it's still awfully useful. There's

an economist, a neoclassical economist, and an entrepreneur walking along the street. The

entrepreneur glances down and sees a $20 bill being an expansive sort of fellow. He says, look,

tell you what, we're walking together. Let's split the $20 bill we both saw. The economist says,

no, actually, in equilibrium, there couldn't possibly be a $20 bill because somebody would have picked

it up. So no, thank you. The entrepreneur shakes his head, picks it up, puts it in his pocket, and keeps the

whole $20. It's a real knee slapper. I tell that joke also, but I tell it with a psychologist,

and I put joking quotes, but you mean it's supposed to be funny? It's a chest. Yes, that's correct.

So it's a jive even at economists who believe the profit opportunities disappear. Well, the thing

is that, and what we're going to talk about today is profits. The question is, what is the source of

profits? And the neoclassical economist would say it's a nonsense question because there's generally

no such thing. The only way you can have profits is a rate of return that's above the competitive

rate of return. And as we all know, if we make the assumptions necessary for competitive equilibrium,

...