Happy New Year! After a long hiatus that was grad school application season, I am back.
While I hadn’t had the chance to write (other than application essays), I did read some books, one of which was “What Money Can’t Buy, The Moral Limits of Markets” by Michael Sandel, a political philosophy professor at Harvard. I found it a fascinating read so I decided to write a little book review/summary, along with a few personal anecdotes.
A small kitten facing a big dilemma
Markets for Death
Back in 2009, I read about life settlement securities, a new product of Wall Street, in my Money and Banking class. Investment banks were now doing what they did with mortgages, but using life insurance policies. They would buy policies from their holders, usually the sick and elderly, offering a price based on the present value of the future payout from the insurance company, which in turn depends on the life expectancy of the insured. These policies would then be spliced, packaged, and sold to security investors. The insured individual receives a lump sum in return for their illiquid asset, and the investors sit back and hope the insured dies promptly on schedule, or sooner, since investors are now responsible for the insurance premiums for as long as the insured is alive. Thus, to diversify risk, investment banks make sure the securities are spread across a range of ailing individuals, including cancer, heart disease, and Alzheimer’s patients. Here’s an ad encouraging policy holders to trade in their life insurance for a lump sum of cash:
These two would be a bad investment – they look too healthy
Fast forward to the summer of 2014, a group of Fed economists and research assistants (myself included) had gathered on the lawn outside the office to enjoy a picnic and some light lunchtime conversation. In an attempt to liven up the discussion, one of my coworkers asked the economists how they would allocate death, if they had no choice but to kill off one-third of the world’s population. Faced with this morbid task, the economists began proposing optimization schemes to ensure the most efficient outcome, whether it was by having people bid for survival (which presumably would allocate life to those who valued it the most—but of course this would kill off the poor, since you can only bid what you are willing and able to pay); killing off the sick and elderly (since they have the lowest life expectancy and thus would gain the least utility from surviving); or allowing individuals to save two people in return for volunteering themselves for execution, which would save the most valued lives from the volunteer’s perspective (although maximizing the welfare of the dead may not necessarily be the most efficient tactic).
Horrified? Yes, my sentiments exactly. But why does the idea of markets in death elicit such a strong negative reaction? Are there certain aspects of life (no pun intended) that should not be governed by markets? This is the subject of Michael Sandel’s book.
The Fairness vs. Corruption Objections to Markets
Sandel identifies two objections to markets: one he calls the “fairness objection,” and the other the “corruption objection.” He gives an example of a case where a non-profit organization offered $300 to crack cocaine-addicted women who agreed to be sterilized, in order to reduce the number of potentially unwanted, drug-addicted babies being born. From an economic perspective, the cash for sterilization program is a win-win solution: it lowers social costs and the volunteers receive compensation which directly increases their welfare. Some critics of the program contested it on the grounds that, while the transaction was voluntary, the women who participated did so under the influence of their addiction and the need for drug money, which constitutes a form of coercion. This was the fairness objection: that participants were not acting with free will. This objection, however, does not contest the transaction on the grounds that the good being traded, i.e. the capacity to bear children, is something that should not be bought and sold. The idea that one’s capacity to procreate is priceless and sacred, or that creating a market for procreation demeans its value, falls under the corruption objection. It argues that commercializing a woman’s reproductive abilities is degrading, and changes the way women are regarded. In other words, the creation of markets sometimes crowds out nonmarket, social norms.
When markets crowd out nonmarket norms
According to Sandel, the conventional assumption is that markets themselves do not influence people’s attitudes towards or the value of goods being traded. This assumption is called into question, however, when markets enter aspects of life which they do not traditionally govern. He illustrates this with a study conducted at a day-care center, which began charging fees on parents who showed up late to pick up their child. Incidentally, the number of late pickups increased rather than decreased, because now parents saw late pickups as a service that they could pay for, guilt-free, rather than an inconvenience imposed on the teacher. The study also showed that once norms are eroded by the presence of markets, they are difficult to regain; even after the fee was removed, the initial increase in late pickups persisted. This is the concern of critics raising the corruption objection against the cash-for-sterilization program, that trafficking in procreation will alter the norms associated with it.
Efficiency vs. Ethics
Having established that markets do influence the goods being traded in some cases, Sandel goes on to illustrate situations in which economic efficiency must be weighed against ethics. One example is Canada’s ban on walrus hunting in 1928, due to dwindling population numbers. A special exception was made for the Inuit natives, whose culture and livelihood had depended on the animal for generations. However, the Inuit initiated an alternative, more economically attractive proposal, which was to sell their quota to tourists who wanted to shoot walruses. The Inuit would still collect and utilize the carcasses as they have always done, but would simply charge a fee for transportation and the right to shoot. Walruses are apparently slow moving, defenseless animals, posing no challenge in a “chase”, and hunters cannot even take the dead animal home as a trophy. The NYT described the hunt as “the approximate equivalent of a long boat ride to shoot a very large beanbag chair.”
From a market perspective, allowing the Inuit to sell their quota increases the utility of all parties involved (except the walruses, who suffer the same disutility from being killed): the Inuit still have the walrus carcasses for their use while earning extra income, the paying hunters get the opportunity to shoot a near-inanimate object, and the quota for the number of walruses hunted remains the same. However, the moral issue that arises is whether this use of the quota is justifiable. The initial purpose of granting an exception to the ban was to preserve the Inuit culture and way of life, but the new tradable allowance arguably strays from that objective. Two things that further complicate the issue are the fact that the Inuit still keep the carcasses, which may help justify maintaining the quota, and the moral question of whether the hunters’ “desire to kill a helpless mammal at close range” is one that should be encouraged.
So if we had to kill a third of the world’s population…
First of all, let’s hope it never comes to that. Secondly, if it did, we might as well do it randomly rather than devising a plan to minimize economic loss. Because as outlined above, economic efficiency sometimes crowds out arguably valuable social norms. I will conclude with Larry Summers, quoted in the book as saying “We all have only so much altruism in us. Economists like me think of altruism as a valuable and rare good that needs conserving. Far better to conserve it by designing a system in which people’s wants will be satisfied by individuals being selfish, and saving that altruism for our families, our friends, and the many social problems in this world that markets cannot solve.” Sandel offers a different perspective: “Altruism, generosity, solidarity, and civic spirit are not like commodities that are depleted with use. They are more like muscles that develop and grow stronger with exercise” I am more inclined to sympathize with the latter view that certain things can be cultivated, and that some goods like compassion, kindness, love, and happiness cannot be incentivized, financially or otherwise. Now go ahead and scoff at my naïveté, you soulless economists… JUST KIDDING economists are great 🙂