latest – Page 14 – Garrett M. Petersen

Artificial Kidneys Would Not Have Been Created in a Free Market

Wearable, artificial kidneys have been in the news recently as a new technological alternative to traditional dialysis. Great news! Or is it?

Don’t get me wrong, this technological advance will make people’s lives better. But the incentives to create artificial kidneys should never have existed.

Before I tell you why, I need to lay out some terminology. In undergraduate microeconomics classes, we distinguish between the short run and the long run. The short run represents time periods during which some factors of production (usually capital) are considered fixed, while others may vary. In the long run, all factors can vary. But both the short run and the long run presume a fixed, exogenous production technology. How do we study situations where the technology itself can change?

Economists have a term for that: the very long run. In the very long run, technology itself can change, so that the same inputs can (potentially) produce greater output. To the extent that people can direct technological progress, they will economize on the most costly factors of production.

A concrete example: your car probably runs on a combustion engine. Combustion requires gasoline and oxygen. Since the car was invented, there have been many innovations to allow cars to go farther with less gasoline. But nobody has made a big effort to cut car engines’ oxygen consumption. Why? Because oxygen is not scarce and gasoline is. In situations where oxygen is scarce, such as at the bottom of the ocean or outside earth’s atmosphere, it would make sense to conserve it.

The development of artificial kidneys means that, at some point, some investor chose to invest in research and development in artificial kidneys over some other investment. It’s easy to see why. Kidney failure affects millions of people and dialysis is both painful and expensive. Some new technology that reduced kidney patients’ suffering and expense would be hugely profitable.

But here’s the issue: kidneys are not scarce. We are all born with an extra kidney. And yet, we have to wait for motorcycle accidents to get our hands on any kidneys. Why? Because it’s illegal to buy or sell kidneys.

Well, that’s not completely true. It is legal to buy and sell kidneys, but only in Iran. And, surprise surprise, Iran is the only country with no waiting list for kidney transplants. If the rest of the world could follow Iran’s lead, the kidney shortage would be solved. Instantly. And if there were no kidney shortage, there would be very few people on dialysis. And if there were very few people on dialysis, there would be a significantly reduced demand for artificial kidneys. And if there were a significantly reduced demand for artificial kidneys, the resources that went into developing them could have been directed to solving other problems.

We have enough problems without creating new ones. There’s no sound justification for the prohibition on kidney markets. They need to be legalized.

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The Most Socially Desirable Outcome by the Least Efficient Method!

Alex Tabarrok has fascinating post about Feeding America, a large non-profit that distributes food to food banks. Feeding America used an inefficient, centrally planned system to distribute foods, which led to a lot of waste.

In 2005, however, a group of Chicago academics, including economists, worked with Feeding America to redesign the system using market principles. Today Feeding America no longer sends trucks of potatoes to food banks in Idaho and a pound of chicken is no longer treated the same as a pound of french fries. Instead food banks bid on food deliveries and the market discovers the internal market-prices that clear the system. The auction system even allows negative prices so that food banks can be “paid” to pick up food that is not highly desired–this helps Feeding America keep both its donors and donees happy.

Food banks are not bidding in dollars, however, but in a new, internal currency called shares.

The funniest part is one of the directors’ reaction to the policy:

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.” But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

Most of the self-proclaimed “socialists” I meet are really more like social democrats. They point to Scandinavia as the ideal model, but Scandinavian countries are actually fairly business-friendly market economies that also have high taxes and large welfare states. They do not feature anything close to Soviet-level central planning of the economy. These sorts of “socialists” really just object to the presumed fact that free markets lead to vast inequality and environmental degradation, and they have vague positive feelings towards government and vague negative feelings towards business.

This woman, however, is a firmly old-school socialist. She genuinely opposes the market per se. These “shares” are reallocated at midnight every night, so there’s no possibility of the share economy producing runaway inequality. And nothing else has changed about these food banks besides the allocation mechanism. They’re run by the same people with the same purpose, they just aren’t depending on an ill-informed central planner to send the right food to the right places.

I find it refreshing that this person is using the word “socialist” in this way. These two definitions of socialism have all the signs of a motte and bailey, where the supporters of a given idea use two different definitions and switch between them depending on the situation. When you’re a socialist defending socialism against critics, “socialism” really just means helping the poor and protecting the environment. But in private, when there are no critics around, you’re happy to support Soviet-style central planning.

I appreciate that this food bank director was willing to defend the motte. If I’m being uncharitable, I’d sum up her position as wanting the most socially desirable outcome by the least efficient method. Luckily, she didn’t get her way in the end.

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Icelandic Sovereign Money with Ash Navabi

Ash Navabi returns to the podcast to discuss his essay, “Will Iceland’s Sovereign Money Proposal End Economic Crises?”

In April of 2015, Frosti Sigurjonsson, Member of the Parliament of Iceland and Chairman of the Committee for Economic Affairs and Trade, made a bold proposal to end fractional reserve banking and replace it with a system he calls “sovereign money.”

Fractional reserve banking is the system under which banks create money by lending out a portion of depositors’ money, keeping only a fraction to pay out on demand. One problem with fractional reserve banking is that the mismatch between banks’ assets and liabilities leaves them exposed to bank runs and financial panics. To solve this problem, the central banks of the world function as “lenders of last resort” to save insolvent banks from going under. However, the more insidious problem with fractional reserves is that the injection of new money directly into credit markets artificially lowers interest rates and incentivizes entrepreneurs to take on longer term projects than the real savings available in the economy can sustain. Having central banks intervene to keep the cheap credit flowing does nothing to address this problem, and in fact makes it worse.

Under the Icelandic proposal, while there would be a 100% reserve requirement for private banks, the central bank would still be able to create money at will. Ash critiques this on the basis of the “Cantillon effect.” The Cantillon effect is the phenomenon whereby the creation of new money transfers wealth to the early holders of that money. If a new dollar is created, the first holder of the dollar can use it to buy goods before prices have adjusted upwards. However, as people exchange the new dollar and use it to bid on various goods, the sellers of those goods will adjust their prices upwards to account for their consumers’ greater willingness to pay. If you are the last to get hold of the new dollar, then you’ve been bidding against the holders of new money for a long time before seeing an increase in your income, thus making you poorer in real terms.

By centralizing money creation in the central bank, Sigurjonsson’s proposal would enrich those to whom the central bank lends. In particular, the proposal would allow the central bank to grant money directly to the government to pay for government spending. Thus, the Cantillon effect would enrich those who are paid directly by the government at expense of those who aren’t. Ash argues that this would invite cronyism, since those with the right connections will be able to benefit from these Cantillon effects.

In the end, it’s not clear whether the sovereign money proposal would have been a net good or a net bad. It could have reduced credit expansion, but the cronyism inherent in the proposal could easily outweigh the positive effects.

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