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of Duke University talks with EconTalk host
about the limits of prices and markets, especially in the area of health. They talk about vaccines, organ transplants, the ethics of triage and what role price should play in allocating. The discussion concludes with a discussion of how markets respond to price controls, particularly minimum wages.
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Readings and Links related to this podcast
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About this week's guest:
. Mike Munger's blog.
About ideas and people mentioned in this podcast:
. Biography. Concise Encyclopedia of Economics. Mentions Rose Bowl ticket example.
by N. Gregory Mankiw., New York Times, September 19, 2009.
, by Hugh Rockoff. Concise Encyclopedia of Economics.
, by David R. Henderson. Concise Encyclopedia of Economics.
, by Mike Munger. On Econlib.
, by Masanori Hashimoto. JSTOR. The American Economic Review, Vol. 72, No. 5 (Dec., 1982), pp. .
, by Daron Acemoglu and Jorn-Steffen Pischke. Nov. 2001. Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 384.
, by Walter Block. Concise Encyclopedia of Economics.
, by Garrett Hardin. Concise Encyclopedia of Economics.
, by David Card and Alan B. Krueger. PDF file discussing their work in their 1994 results: "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania." AER. September ), pp. 772-93.
at the Library of Economics and Liberty.
Podcasts and Blogs:
. EconTalk podcast.
. EconTalk podcast with Mike Munger on rent-seeking.
. EconTalk podcast. Discussion of per-cup tax on coffee.
Highlights
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0:36Intro. [Recording date: October 14, 2009.] Housekeeping: Last week, asked what would happen to the size of coffee if a per-cup tax was put on coffee, W hints have been added.
Archive of all podcasts available on EconTalk. On Twitter at EconTalker.
1:42Price signals. Email from listener, Caleb: use of prices in allocating scarce stuff, particularly in area of vaccines. If you have a potentially life-saving vaccine, do we really want to let the market set the price? Often isn't enough vaccine to go around. Are we limited by the physical rules of the world around us or can we make up an alternative world? If we can make up an alternative world, where people always do what "we" think is the right thing and were altruistic, we might not want to have price.
Might want to have people working for the public good, with full information and with all the right incentives and resources to do their job.
A lot of medical people think we live in that world. Maybe economists live in their own world.
Suppose we don't have enough and we are worried about how to allocate stuff and how to choose a system where there is more stuff to allocate. If you look just at how do we allocate stuff we have, seems that price isn't fair. The rich a violates moral intuition.
Do rich really get more?
True that market can price some out of the goods, but that's not always true. Even if it were true, wealthy people would have some advantage.
What people ignore is the importance of the responsiveness of the amount of stuff we have to the mechanism we choose for allocating it.
We c people could queue up-- could use authority--scientists have studied this and they think person A needs it more than person B. Could use personal preference, favoritism--probably bad idea but a lot of the schemes we actually choose end up increasing the amount of favoritism that somebody who's going to hire someone--in context of the minimum wage--or local official i or set up a rent-seeking contest, making whether you get it depend on the amount of time and effort you put into making the application. Ditch-digging contest--if you want the scarce thing, you have to dig as big a ditch as possible.
Part of the reason people don't like price is that it's impersonal.
Price does two things--it allocates, some choose not to buy it, like luxury cars, the nth pair of shoes, or a vaccine. What non-economists focus on is that price also redistributes between buyer and seller within any transaction. My loss as a buyer looks like y so it looks like a 0-sum game--though it's not. If the transaction is going to take place, that if is very important.
If it does not take place the buyer will be worse off. Can change the buyer into a non-buyer, particularly if the shortage is unnecessary--meaning if we used a different scheme there would be more of this stuff. Vaccines: notorious shortages in the United States--when people want to have a vaccine, it always comes in late, there's not enough.
It's true that it's not very expensive, cheap once you actually get it.
But long line you have to wait for. Like buying sausage in Poland or the Soviet Union--had to check and see if your local butcher actual most days they don't.
On a good day,
people run down, stand in line, and the first few in line can buy meat, at the state-sponsored price which is ridiculously low.
The reason there may not be much in the front window is that he's sel don't know that we have a black market in vaccines in the United S confident that we would if H1N1--the swine flu--became much more virulent.
People from the former Soviet Union coming to the United States would often carry large amounts of cash.
Response: What if there is a TV? Usually no TVs in Soviet stores, but if there were, you wanted to be sure had a lot of cash on hand that day.
10:21In the case of vaccines: isn't the problem just a physical problem? The reason there's a shortage is that it takes a while to produce it.
Might be true.
But the fact is that in the last two years three large manufacturers have left the business--can't make profits or guarantee the employment of their workers. Physical problem--maybe government should buy these companies as well as General Motors (GM)--but that misses the point. If for some reason it's not profitable for the private sector to produce this, there must be some reason we are not compensating or giving signals to the private sector about the value of these vaccines that is not getting through.
Most people feel it's really valuable right now, really want one.
Two vaccines now--regular flu and H1N1 vaccine--possible confusion or conflation.
Walgreen's has given twice as many flu vaccines as it did last year, just for the ordinary flu--which season doesn't start till December.
Flu can kill you if you are old, young, or frail.
Worries people.
Total of 600 deaths f we have 36,000 deaths every year from flu in the United States.
Many other vaccines crucial and important.
We've taken the profit out, basically said that if you come up with a better vaccine you can't profit from it
government is the major purchaser of these vaccines, which is another non-market aspect.
Won't let price be what thus frequent shortages.
Too important to
put the Motor Vehicle Department in charge of it will all of their efficiency and politeness.
Why should government be better at doing it?
Heart of the matter--we have a sense that it's wrong to use the profit motive at all as a way of organizing production that's involved in serving really desperate needs.
Emotional aspect discussed in other podcast.
Story: talking with do she remarked that she'd be getting her shot soon--probably better that doctors get vaccinated sooner because they come in contact with people who have it.
But with regard to profit motive, she said: I wouldn't trust a vaccine that was made by somebody trying to make a quick profit or take advantage of people. Captures a lot of the emotional and philosophical view about desperate situations.
Of course, she char if you go to her with your child and said you don't think you want to pay her today because you wouldn't trust her--with child really sick--she'd be horrified to be told she was distrusted.
Would she be an even better doctor at no price.
Fundamental truth to her observation: we'd like to rely on love and affection and decency as a way to get stuff done, but that's not working for the swine flu. She needs to cover the average cost--medical school--but she might be happy to help people free at the margin.
But shortages vaccines are physical things. Big asymmetry of information. Went to drug store, someone unknown, put a needle--don't know where it's been--into a bottle and injected arm.
Great--only $5 instead of having to make appointment with a doctor and pay $100; displacing some of the monopoly and entry barriers, because now there are all sorts of things that physicians' assistants can do.
18:31At a point in time there is only a limited physical amount of vaccine available, not enough to go around at the price being charged.
Do we want our society to decide who lives and dies based on how much someone is willing to pay?
Greg Mankiw example, NY Times column.
Suppose there is a Dorian Gray pill--every day you take it, you don' and a year's supply costs $150,000 dollars. Would we want to allow that pill to be bought and sold by the marketplace? The premise is that there aren't enough of thes and in paper, Mankiw supposes that you can't much change the amount.
If you could subsidize it and make it so that there was enough to go around, that would be different. What would be the alternatives?
Could do it by authority?
Who are the people who are smartest, who would contribute most to society? Maybe the prettiest. Not Matt Holliday, missed fly
true Cardinal Fan. Could have a lottery.
Or could have price.
If we used price, objections because it would create a two-tiered society.
Might take a vote and outlaw the pill. About to do that in health care.
Liver transplant costs about $1.2 million before you go through all of it. We obviously can't do that for everybody. Some wealthy people who have gilt-edged health plans probably can get a liver transplant.
What if 70-year old? Germany or England impossible legally to get a liver transplant.
Laws can only control what's legal. Vaccines: are we going to let people make their own choices knowing that they can make bad choices? Disagree: not good example. Characterized Mankiw's example in a certain way.
Kind of example that makes for a good high school biology or ethics discussion in religious schools: four people on a boat, only enough water to save one: who gets it?
Should give it to the youngest--he would live the longest and hence benefit most.
Or to most valuable person, most beautiful, smartest, best carpentry skills, best artist, best parent--arguable. Learn from those conversations.
Whoever could pay the most for it, and then compensate, giving money elsewhere.
But it's the wrong question: if you are in a rowboat, and you only have enough water for one, people do brutal things or honorable things--and it's a moral dilemma.
But the way people pose the moral dilemma is a false way of posing it. Does it correspond to anything in economic life, in a market system? For example, when cars were first invented, only rich people had cars.
Could have said early on that it isn't right that rich people are scooting along in these vehicles while poor people are
we can't allow a two-tiered system.
Took 60 years, two generations--everybody has a car.
Not everybody can have a Lexus.
Eleven-year old wants a Ferrari.
To say it's not fair if rich people get the Farraris and poor people don't--that is true--but poor people get Hondas, really nice, get you from A to B just as successfully.
Incentive for person making the Dorian Gray pill to sell it to lots of people at a lower price.
28:06Two different things Mankiw's example might illustrate.
First, suppose there is not enough of the stuff. Then we have to decide if we are going to ration it by price, need, or something else.
Second, suppose the amount of the stuff responds sharply to the way that we allocate it.
Then: are we going to let price or command cause the increased supply? Top-down or bottom up.
People trust command more than price. Go to the pill: unrealistic, artificial to say there is not enough and we can't make any more.
Liver transplant example: is that not a perfect counter-example to claim that it doesn't correspond to anything in real life. An economist is someone who believes as a matter of moral good that the infant mortality rate should be positive--some children when born should died because it is too expensive in terms of the opportunity costs to keep them all alive. We'd have to give up education for other children, etc.--just not worth it.
Health car the idea that it should be free is insane. Suppose you will live another 20 years and you will die for sure now without some operation--how do we decide how to allocate that.
W but we wouldn't like to.
We could afford to give everyone a liver transplant who wants one, but what would we have to give up?
That's what "afford" means. Could afford to give kid a Ferrari--just a skinflint--sell house, could afford it.
Choose not to afford it.
We choose not to give liver transplants to everybody.
Liver transplant is more important--people say the reason we can't let market decide for liver transplants is they are more important.
Other way around.
Want market, economies of scale that come with liver transplants.
Why are liver transplants so expensive? We don't let people pay for livers.
We bury so many good livers--some would be donated in exchange for funeral donations and college education for kid.
Also expensive because of complexity of operation involved.
It's not that we don't allow any liver transplants.
We just subsidize some kinds, but not others.
If a 90-year old person is rich, he can go somewhere else and buy one. Artificial shortage.
Other argument: could look for non-top down ways. Acqu and to whom does it go.
Letting the market handle more of the compensation from whom the liver is harvested--allowing them to sign a contract saying the compensation after unlikely event of death would go to heirs.
100% but at a time when a good donor, so between the ages of 25 and 55 for non-drinker.
Under that situation there is a moral hazard problem--both the heirs and sometimes the doctor are over-eager to advance the time of death.
Monte Python skit along those lines. It's happened in poor societies and bad systems of justice--can get people murdered for their body parts.
Black market now in these organs because we have not gotten our act together.
Doctors want to get access to those organs--discretionary authority, power in the hands of individuals.
Livers more likely to pull the plug.
If there were more of a market in it we wouldn't be so likely to pull the plug.
37:31Other kinds of price restriction--minimum wage.
Discussed in a previous podcast in other countries that use more command and control. Classic Alchian and Allen example: out of print textbook--article in Concise Encyclopedia of Economics on Econlib: Why would the people who run the Rose Bowl not try to make as much money as possible?
100,000 seats, more than that many people want to go.
Why not raise the price of seats?
Many answers to this problem. Rock concerts. Suggestion: might want to have excess demand for those tickets: People who are selling the tickets don't get the difference in price, but if you keep the price low they themselves get the benefit of being able to allocate them.
Like political power of old kings to give away treasure.
Tom Hazlett. FCC decided to give away portions of spectrum based on an application.
Rent-seeking may dissipate some of that value in a way you don't recover through money. Chinese officials: terrible problems with price ceilings.
Rice is really expensive, so let's then everybody can afford it.
Problem is: that creates a shortage.
Can give out coupons.
The local official gives out too many coupons--inflation in coupons--and can give them out with discretion or give them out through a black market.
Who do people blame?
The lazy farmers--not producing enough rice.
People fundamentally misunderstand the minimum wage.
It's a floor, but it creates a difference between the market price and the price that people are allowed to transact, so a lot of transactions don't take place.
Get paid more if you have a job than you would without the minimum wage.
But what if you don't have a job?
Creates a reserve army of unemployed. Whole bunch of people looking for this job.
Employer looks around and decides who to hire based on other criteria.
Standard way to teach about a price floor like this--say the wage for a particular low-skilled person.
In the absence of the minimum wage, say you make $5/ but it's $7.25 with minimum wage, so there are not many of those jobs. Orson Scott Card: That's good because those are crummy jobs, jobs that people can't make a living on. A bunch of people are hurt, say the economics-trained supporters, but some people are making $7.25, so they are better off.
Utilitarian: add up the gains to the people who get to keep the jobs, take away those who lost the $5, and now it's an empirical question: What's the elasticity of the demand for low-skilled labor? How responsive to price?
What if it's not very many fewer?
What if thousands get a raise and only one person loses a job?
Plus social safety net available.
Blind application of supply and demand.
Barzel, how competition takes place.
On a different margin. Price is one way people compete.
When wage is artificially high, more people want to work--excess supply.
Normally th but that' assume no black market, though plenty of that.
Created a reserve army of people who would like to work at $7.25.
Not just waiting outside.
The beneficiary who is employed at $7.25 is in a position to be exploited by his employer and often exploits himself: how hard you work, how many breaks you get, split shift, pay for own uniform, do you get training on the job--mentoring, get better at what you are doing.
All of that will be reduced.
Plus some of these businesses that were close to failing will fail.
It's not just that your employer will take advantage of you, but you realize that if you lose your job it will be a lot harder. Pushes down non-monetary compensation.
50:20Like hydraulics: if there is this surplus, it gets pushed to some other margin.
Regulating airline prices in the 1960s--couldn't lower your price, so they started competing on the kinds of meals they offered, sandwiches, lunch was large sirloin steak between two tiny slices of bread, called a sandwich. Also competed by offering more flights for connecting cities, meaning more seats available.
Stewardesses more attractive, seats more attractive.
But that mix was not the mix the consumer wanted.
The guy employed at minimum wage would prefer being treated better at lower wage.
Not true for some employers will be just as pleasant, won't fire anybody, won't substitute but maybe not true now when times are hard-pressed.
Ironic: employer who responds to the incentives is an exploiter, barks at workers, no benefits, no health care, no ride to w will fire at the drop of a hat.
Then people say that's what happens with greedy employers--yet it's the law.
Flip side: you're going to tell me that in the absence of the minimum wage that people making $5 an hour are going to get health care benefits and friendly employers? At the margin, it has to be true.
Workers will exploit themselves in the presence of the minimum wage.
Two economists talking in their fantasy world about competition.
Is that naive? Faith-based economist? If you close off one margin, we do see people to compete on other margins.
Munger worked minimum wage wouldn't have been able to find a job had it been higher--a "living" wage of $10-$14/hour.
Couldn't have worked way through college. Raising the minimum wage means some people who are economically marginal are able to find a foothold, develop work skills, and maybe move to something else.
Some don't, but big increase between $7.25 and $5.
Most would understand the effects if it were $50/hour.
57:41If you artificially price stuff, you will see quantity responses.
Interesting: non-quantity responses, hidden aspects.
Rent-control apartments: landlord slow to fix the toilet, doesn't paint, you fix things yourself, chooses people on discriminatory ways even if it's against the law.
What would non-economists think?
It happens at the margin, not sure of margins.
Willing to bet that most listeners have never thought about competition on margins other than wage before. Just raising the question: this is a possible cost of minimum wage, prices on rice or apartments--let's try to take that into account.
59:31[Note recording date is October 14, 2009.] Last week, Elinor Ostrom and Oliver Williamson awarded Nobel Prize in Economics.
Ostrom: empirical work studying tragedy of the commons and how groups of people have responded to that challenge through non-monetary cultural norms, voluntary agreements.
Standard way economists look at the tragedy of the commons is: It's going to be ruined. Species will go extinct, grass will be eaten to a nub, so we need government.
Garrett Hardin's conclusion: only government can solve this.
Ostrom asked: Is it true?
A type of work disdained by most economists--she does case studies. Munger: That's why I'm in a political science department. Russ: And so is she.
She saw what different people did in different situations.
Maybe this matters.
Card and Krueger: minimum wage
skeptical, also skeptical of empirical work in other direction.
Hard to tease out such small effects.
Recent jump in teenage unemployment is suggestive.
Would be useful to look at the non-quantitative measures.
Can't run a regression.
Useful to see how those have changed.
Useful to see how competition actually works, as opposed to saying supply and demand cross, therefore we're done. Talk to employers, natural experiment.
Some of what Card and Krueger would like to exploit: sent out a survey, tried to control for other factors. On a more sociological style, case-study basis.
What might you uncover?
City of Santa Fe raised their "living wage" to something dramatic, from something like $7/hour to $14/hour.
Interviewed people: what would you do with the money?
No one asked if they thought they might lose their jobs over this.
Would be interesting to go back to those folks and ask how their lives have changed. What happens in a poor neighborhood when housing prices go up?
You get gentrification.
Why wouldn't that happen when the minimum wage goes up--you get job gentrification? People who before wouldn't have applied now apply and crowd out all the residents of this neighborhood who used to live in this low wage neighborhood.
Not true that things stay static.
Illustrates essence of economics: And then what?
Attributed to Thomas Sowell? Can't hold everything else constant.
Understanding economics improves your imagination.
Improving your imagination improves your economics.
Can see the hidden stuff you'd miss otherwise.
The Seen and the Unseen.
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