So Alvin Roth wins the Nobel Prize for, among other things, figuring out the best way to allocate kidneys subject to the constraint that you’re too damned dumb to use the price system.
Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.
I think the best argument against kidney sales is that it might decrease public support for assistance programs for the poor, if kidneys become viewed as something that you could trade for cash. As one blogger put it (I wish I could find the source now, but Google failed to turn it up) — “Hey, why should you be getting welfare if you still have two kidneys?”
Now, most libertarians are opposed to government welfare anyway, so for them this would hardly be a reason to be against kidney sales. But for anyone who does support at least some government assistance to the poor, there is the possibility that it could be undermined if kidney sales became legal.
Interestingly, this implies that perhaps people would not have a problem with legalizing kidney sales if the seller were above a certain income level, say, $50,000 — because then the legal sales would not threaten the existence of support programs for the poor. Economically, this seems counterintuitive — only letting people sell their kidneys if they *already* have enough money — but it instinctively strikes me as less “icky” than asking the poor to sell their organs.
(When someone first asked me why I was against kidney sales, I gave the answer that most people seem to give — that I didn’t want only “the rich” to be able to buy kidneys — but on later reflection realized this was obviously wrong. First, because even if only “the rich” could buy kidneys, at least those would be kidney transplants that weren’t taking place before, so that would be a good thing. Second, most economists think that if kidney sales were legal, the price would stabilize at about $1,000, which is much less than the “list price” of the operation itself. So if you’re rich or your insurance covers the operation, you’ll be able to pay for it, but if not, you won’t — however, in either case, the legality of buying the kidney *itself*, makes almost no difference, compared to the cost of the operation.)
I think the best argument against kidney sales is that it might decrease public support for assistance programs for the poor
Yep, you know, you need a kidney and would gladly pay to that poor guy there to sell you one? Tough luck, we won’t allow you, as this would decrease public support for assistance programs for the poor…. Hope you feel better now knowing that…
Btw, we shouldn’t probably let poor people work, because, you know, that would probably decrease support for poor people, because – hey, you could be working 16 hours a day, 7 days a week, cleaning up the public places and doing things….
In Alvin’s defence it’s not his fault that the market isn’t allowed to operate properly. He merely found a way around the problem
I presume your objection is to the system, rather than to Roth. He is only working within the constraints that exist. Given that we do not have a price, better allocation is surely of benefit. And to be fair, it is the media that has focused on the kidney application. Their work is used in other markets that do not utilise price, such as school place allocation and matching new doctors to hospitals. Maybe you can level the same accusation that these should use the price mechanism? However, there must surely be some situation where price is not a reasonable mechanism – or is there? The original Gale-Shapely algorithm was applied to the “Stable Marriage Problem”.
Poor old David Gale of the Gale-Shapley algorithm- I guess he missed out by being dead. Ralph Steinman was allowed to keep his, even though he was dead when it was announced.
“In Alvin’s defence it’s not his fault that the market isn’t allowed to operate properly. He merely found a way around the problem”
You’re absolutely right. We all need to adapt to the new economy, especially if Obama is re-elected.
@Harold: I am pretty sure reading Steve’s comment he is expressing frustration at the constraint. That constraint is a legal ban, almost everywhere, on selling kidneys. Roth’s matching algorithm makes the best of a bad situation, but making a bad situation better is preferable. Adoption of Roth’s algorithm does not appreciably increase the supply of kidneys; allowing a market would. That would save lives.
Of course Steve may also be irked that the Nobel for Roth will be widely seen and used as approval of the status quo.
Or how about a Nobel to Scott Sumner, for figuring out the best monetary policy in a world where massive government interventions interfere with wage flexibility?
(Zing!)
Guys, guys, guys — Landsburg is just expressing sour grapes at, once again, being passed over by the Nobel Committee. We go through this every year, remember?
Yeah, we all acknowledge that it’s a shame that in Swedish, “Landsburg” means “Santorum.” But hey — every market has its imperfections. Develop a theory to overcome those imperfections, or get over it.
And pass the kidneys, please.
On organ transplantation, the WHO guidance says it is:
“Committed to the principles of human dignity and solidarity which condemn the buying of human body parts for transplantation and the exploitation of the poorest and most vulnerable populations and the human trafficking that result from such practices;
Determined to prevent harm caused by the seeking of financial gain or comparable advantage in transactions involving human body parts, including organ trafficking and transplant tourism;
Convinced that the voluntary, non-remunerated donation of organs, cells and tissues from deceased and living donors helps to ensure a vital community resource;
The guiding principles are here:
http://www.who.int/transplantation/Guiding_PrinciplesTransplantation_WHA63.22en.pdf
Guiding principle 1 says that consent is required from the deceased. Implied consent is OK, but “consent is the ethical cornerstone of all medical interventions”.
It is 5 that concerns us here. This says financial transactions should be banned because:
“Payment for cells, tissues and organs is likely to take unfair advantage of the poorest and most vulnerable groups, undermines altruistic donation, and leads to profiteering and human trafficking. Such payment conveys the idea that some persons lack dignity, that they are mere objects to be used by others.”
Are these assertions true? First, taking advantage. It is very likely that poor people would be taken advantage of through aggressive marketing, mis-information and direct coersion. This already happens in other markets. There are special reasons to be worried in organs due to the irrevocable nature and very long term effects.
Second – it would very likely undermine altruistic donation, but would that matter if there were plenty of organs?
Profiteering and human trafficking? Yes, this relates to the first point. It would increase, but it is illegal, so banning the trade is not necessarily the best way to challenge this. Effective regulation MAY be possible.
Lack of dignity? Probably, but does banning people from consenting to a procedure that they would like to consent to offer any greater dignity? This seems to contradict principle one, where “consent is the ethical cornerstone”.
Overall, there seems to be three worries. 1) That people are unable to properly give consent, and therefore would be exploited. 2) That people would be abused without their consent, 3) That such a trade would result in a general deterioration in attitudes to others that would be deleterious to society.
My personal belief is that all are potential pitfalls. I may support a market if there were sufficient safeguards – i.e. it would need to be a strongly regulated market.
Ken B – “Adoption of Roth’s algorithm does not appreciably increase the supply of kidneys” I understood that the algorithm would increase the pool, because the relative of a donor would obtain benefit from the donation. This makes live donation much more attractive. I would have thought this was “appreciable”.
Bennett,
it instinctively strikes me as less “icky” than asking the poor to sell their
organslabor.Why is selling a kidney somehow different from selling labor? Why is it so bad to let poor people make money? You do realize, don’t you, that the only way poor people can become not poor is by selling things that other people want?
When someone first asked me why I was against kidney sales, I gave the answer that most people seem to give — that I didn’t want only “the rich” to be able to buy kidneys — but on later reflection realized this was obviously wrong.
Why would anyone think this is a good argument against selling anything? Why is it so strikingly bad that the people who have produced the most can buy more things?
A Gulfstream can only be bought by the rich. Do you think the sale of these planes should be banned because only rich people can afford them? What do you have against the rich buying something? The house I own cannot be bought by most Americans. Should I have been banned from buying it?
“Why is selling a kidney somehow different from selling labor?
Because the “lump of kidneys fallacy” is actually not a fallacy.
@Harold: It’s a relative term. The Roth algorithm operates between families who have a recipient. So some marginal cases may find participation a bit more attractive. But that’s still a relatively limited base. An actual market would do much much more.
Doctor Memory has correctly identified why selling chairs is immoral and should be banned. The “lump of chairs” fallacy is not a fallacy.
Steve,
Al would probably agree with you that kidneys should be bought and sold. Where you differ is in your unwillingness to accept certain constraints imposed by our society. These constraints may be misguided, but they are real in the sense that neither you nor he have sufficient power to get around them. You will spend your life railing against them, and you will be right but most people will not listen, and that is the way of things.
We can be upset about that all we like, but being upset doesn’t increase welfare. Meanwhile, Al has improved the world considerably.
Why are you comparing Al’s achievements to the optimum? I reject your benchmark. Compare his achievements to the baseline! Al has left the world in a *much* better state than he found it.
“wins the Nobel Prize for, among other things, figuring out the best way to allocate kidneys ”
that “among other things”….contains a LOT of other things that your objection does not apply to.
Matching problems in general are not like buying apples at the store. If I am a seller of apples, I don’t care who gets my apples beyond the fact that they’re willing to pay the highest price. But if I’m a hospital looking for residents, I *don’t* necessarily want the ones willing to work for the lowest salary. When both sides have potentially complex and idiosyncratic preferences over each other, a well-functioning market doesn’t always spring up of its own accord, and a price-based market is not always the best solution.
Next up: A Nobel prize in medicine for figuring out the best way to keep a large class of people alive, which incidentally includes the guy repeatedly shooting himself in the head.
That sounds like sorcery deserving of a nobel prize to me…
Ken B. I believe there is the possibility of recipients getting priority in the cadaver donor queue if they have a living donor, should no matching living donor be availble for pairing. Thus the donors chosen recipient should benefit in all circumstance. I may be wrong, but if I am, I suggest such a system be implemented, and await my Nobel prize.
The number of kidneys is more fixed than the number of chairs, but I am not sure how this fits with the lumps.
Ken: I think there are issues in selling a kidney that are not present to the same extent in selling labor. This also illustrates the proper meaning of “irrevocable”. Selling your kidney is irrevocable, selling your labor is not. If you decide you made a mistake in taking that job, you can leave. If you decide you made a mistake selling your kidney, then tough luck. It makes little sense to say that selling your labor and selling your kidney are both irrevocable because the time you spent doing the job is irrevocably lost.
The effects of selling a kidney last for the rest of your life, which may be shorter as a result. It is just about impossible for anyone to make a truly informed descision about this.
This does not mean that we should not necessarily do it, but it does mean that a market failure is both more likely and more serious than the labor market, and we should pause a little before allowing a “free” market solution.
@Harold:
The effects of not selling a kidney last for the rest of your life, which may be longer as a result. It is just about impossible for anyone to make a truly informed descision about this.
The effects of buying a kidney last for the rest of your life, which may be longer as a result. It is just about impossible for anyone to make a truly informed descision about this.
The effects of donating a kidney last for the rest of your life, which may be shorter as a result. It is just about impossible for anyone to make a truly informed descision about this.
Harold,
This also illustrates the proper meaning of “irrevocable”. Selling your kidney is irrevocable, selling your labor is not.
This is false. The labor I sell to my employer today can never be recovered. For each minute I spend at my desk is a minute that can never be used doing anything else.
Additionally, selling a kidney is certainly not “irrevocable”, in the sense that you mean, any more than selling a car is irrevocable. If I sell my car, this doesn’t mean I will never own a car again. If a market existed for kidneys, if I needed one, I could buy one, even if I sold one previously. That, in fact, is how markets work.
It is just about impossible for anyone to make a truly informed descision about this.
Again, this is false, unless by “truly informed” you mean “perfect knowledge”, in which case no one can ever make a truly informed decision about anything.
Harold: >>Selling your kidney is irrevocable, selling your labor is not.
That’s true only in the narrow sense. Selling *your* kidney is irrevocable, in that you can never get *your* kidney back. But you can get back a functioning kidney. In a market, this is easy – you can buy one.
Once you assume that most people care more about the function of a kidney than some sentimental attachment to the kidney they were born with, this objection becomes a non-issue.
In fact, a thriving kidney market makes it *more likely* that people will donate (read: sell) their kidneys, precisely because a substitute is only a purchase away. People routinely sell expensive, necessary items (cars, houses, etc.) because they know they can buy another one should the need arise. Kidneys are no different.
The natural objection is that someone selling a kidney today is unlikely to be in a position to afford to buy a kidney tomorrow if needed. However, that can easily be solved by insurance or by charity.
Profiteering and human trafficking? Yes, this relates to the first point. It would increase, but it is illegal, so banning the trade is not necessarily the best way to challenge this
No, it would decrease. The incentives would be lower thanks to the lower price thanks to the voluntary donators.
we should pause a little before allowing a “free” market solution.
Hello patient, you say you know a willing donor that would sell you his kidney? You should pause a little before “we” allow you and your friend to do the exchange, you know, there might be a market failure hidden somewhere….
Why do I find this so repugnant?
I’m sorry but your post is a bit obscure for me (I’m French). Please could you clarify it a bit? Thank you.
@Ken: I was sorry to see your quick and definitive dispatch of Harold’s case. Because you know what I find repugnant? Those little snot-dnagelr nose rings. Awful, awful. And I’m looking for arguments that will justify making other people pay for my emotional reactions. That would be awesome.
And you go and louse the whole thing up!
@moggio: Let me transalte. “Tout le monde a tort.”
Applies to most of Steve’s posts. :)
Some numbers here. http://www.bloomberg.com/news/2012-10-16/an-economics-nobel-for-saving-lives.html
You know, I hadn’t thought about this before. We’re staring at a big, fat market failure here.
Duh, you say; any banned substance defines a market failure. But that’s not what I’m talking about.
See, I donate blood regularly, even though I get no money. Why? I can do some social good at very little cost; I replenish my blood supply regularly whether I’m sharing it or not, so why not share? (And, ok, I get Lorna Doones afterwards.)
But it never occurs to me to donate a kidney. Why not? Higher costs. In particular, the blood supply is sufficiently liquid (ha!) that I can give blood while being reasonably confident that I could get substitute blood if I need it. I don’t have the same confidence about the kidney supply. If I give up a kidney, and then I need a kidney, I’m screwed. So I hang onto my spare.
In short, by hanging onto our spare kidneys instead of banking them, we’re self-insuring – which means we’re all forsaking the advantages of risk-pooling. Because there is no FDIC of the kidney bank, we all live in fear of depositing a kidney in the organ bank because we’re not confident that the bank would have the assets to permit me to make a withdrawal when needed.
But imagine some critical mass of people put their kidneys on the market, such that the supply swamped the demand. This would help anyone who knew she needed a kidney. But it would also help anyone who knew that she would like to donate a kidney, by providing a liquid supply of replacement spares.
This arrangement would seem to help everyone – except, I guess, risk-loving people who wanted to maintain a high price for their kidneys. But that’s akin to saying that the FDIC helps everyone – except risk-loving lenders who wanted to enjoy the high risk premiums of making deposits into banks that lacked FDIC insurance. By and large, I think there must be a kind of market intervention that would produce better outcomes than the status quo, or even better than laissez faire.
My recollection is that there have been two objections to the idea of selling organs:
1. I am in a car accident, and I’m now in a coma. The doctors tell my wife that I am permanently vegetative, and she can get $10,000 for each of my kidneys, and more for other organs. The moral question is, should the potential benefit to my wife be a factor in her decision to end life support? What if it’s not my wife, but my next of kin is my sister who has always disliked me? Personally, I think it would be great if my wife could get a financial benefit from such a bad situation, but some people find this morally objectionable.
2. Some find a situation where organs are sold to the highest bidder distasteful. Are we going to create a market in kidneys, where the 1% are bidding for young healthy kidneys from teenagers that died when they went off the road while texting, while the poor have to take kidneys from deceased winos? I don’t think that’s too far from the current state of the U.S. healthcare system, but I can under why some find the idea objectionable.
What if kidney donors were given absolutely top priority for a new kidney should they ever need one? Wouldn’t that be enough incentive to donate?
As to keeping the poor from selling kidneys, compensation could take the form of a non-refundable tax credit.
I’m not advocating the above, merely tossing out ideas for discussion.
nobody.really,
See, I donate blood regularly, even though I get no money.
You can still sell your blood if you want, particularly if you have a rare blood type. You are not banned from selling your blood, the way you are banned from selling a kidney.
In fact, there is a fairly thriving market for selling blood plasma. I used to do that when I was broke. It helped, even the little bit that I was paid was worth it. In fact, you can sell blood plasma way more often than you can donate blood (twice a week if you want), which shows the weakness of your argument that the reason you donate blood for free is because you “replenish [your] blood supply regularly whether [you’re] sharing it or not, so why not share”. That is true and even more so for blood plasma, yet people sell plasma rather than donate it.
I don’t have the same confidence about the kidney supply.
Why? If there is a market in which you can buy and sell kidneys, then why would there not be a kidney available to you when you want to buy one? There are 116,115 people on the kidney transplant list. That’s 0.0373% of the US population. Is 0.0373% of the population such a burden that no supply could ever meet that demand?
I think there must be a kind of market intervention that would produce better outcomes than the status quo
What greater market intervention could there possibly be for the status quo? What market intervention is greater than the wholesale banning of organ selling?
Joker,
What if kidney donors were given absolutely top priority for a new kidney should they ever need one? Wouldn’t that be enough incentive to donate?
How? I am pretty healthy with zero history of kidney problems in my family history. Since it is incredibly unlikely for me to ever need a kidney, how is the enticement that should I ever need one, I will be first in line if I donate? Your asking those who are all ready at risk for needing kidneys to donate. The only real way to eliminate the supply shortage is to incentivize those who really have to risk of ever needing a kidney transplant to donate.
So the real question is how to you incentivize people like me to donate, not those who are at risk of needing a transplant in the future.
Al V.,
The moral question is, should the potential benefit to my wife be a factor in her decision to end life support?
How is this any different from an heir standing to inherit a lot of money from a wealthy person in a coma dying?
Are we going to create a market in kidneys, where the 1% are bidding for young healthy kidneys from teenagers that died when they went off the road while texting, while the poor have to take kidneys from deceased winos?
You are assuming your conclusion. To see how your assumption is wronge, the richest 1% of those on the kidney transplant list accounts for only 1,161 people (since there are only 116,115 on the transplant list). Are you really saying that after exhausting 1,161 kidneys, the only kidneys left are from deceased winos? Do you think that even after selling 116,115 kidneys, all that’s left to choose from are kidneys from winos?
Ken, I agree with you. I was just posting the arguments I have heard from other people, which I personally don’t agree with. Isn’t the whole point of having markets to ensure the efficient allocation of resources? And isn’t the problem of inefficient allocation of kidneys a market problem?
What “commodities” exist that people wish to acquire, but which they are not allowed to buy? Three I can think of are organs, children, and wives (for some reason, nobody wants to buy husbands). People do all kinds of things to acquire a child if they, for some reason, can’t acquire one through normal means. There is a secondary artificial constrain on organs, because even if I can buy a kidney on a black market, I can’t install it without a qualified surgeon and appropriate facilities. There is a way to buy wives, but as my friend Richard discovered, it’s hard to keep them once you buy them.
Ken, economiser: I think the costs of receiving a transplant have been underestimated. You are on anti rejection drugs for the rest of your life, and there are significant health consequences. Donating your kidney is irrevocable, but you may be able to get an inferior replacement. It is not like selling a car. There are also health implications from having only one kidney, such as raised blood pressure. How many of us would welcome higher blood pressure?
“The labor I sell to my employer today can never be recovered. For each minute I spend at my desk is a minute that can never be used doing anything else” Yes, but to be irrevocable you would have to sell yourself into slavery. You can revoke your choice to work for the employer any time. You cannot revoke your choice to donate a kidney. I accept that a kidney market would reduce the costs of your donation ( because a replacement is more likely to be available), but you can never go back to having your kidney in the same way you can go back to not working for the employer.
Ken B: “The effects of not selling a kidney last for the rest of your life, which may be longer as a result. It is just about impossible for anyone to make a truly informed descision about this.” Wrong. The effects of not selling a kidney do not last the rest of your life if you sell it tomorrow. They last until tomorrow. Its that irrevokable thing again.
“The effects of buying a kidney last for the rest of your life, which may be longer as a result. It is just about impossible for anyone to make a truly informed descision about this.” Well, it is much easier to make a choice here, because the choices are so stark. If it is either death or paying for a kidney that may help inform the choice. I think it reasonably likely that most people would remain happy with the choice they made.
“The effects of donating a kidney last for the rest of your life, which may be shorter as a result. It is just about impossible for anyone to make a truly informed descision about this.” Yes, this one sounds about right. It seems we agree about one in three!
I am not saying that a market would not be preferable to the current situation, but that regulation would be needed to reduce predictable market failures.
Ken agrees that perfect knowledge is impossible, so any market has built in failure to some extent. It is negligent to make no attempt to forsee these when introducing a new market.
Harold:
Ken’s point is that the time you spend laboring for your employer can never be recovered.
You are taking issue with the risk inherent in donating (selling) a kidney. There are certainly risks, both in the surgery itself and in the recovery (which may last a lifetime). But the market price compensates for those risks, just as the market price compensates for risky jobs or risky activities. For example, working on a construction site involves both giving up your time today and assuming a risk that you may get injured, which will affect you going forward. This is all built into the wages.
No one has perfect information, which means the price mechanism is the best approximator we have.
I don’t believe you (or anyone) can anticipate if/where market failures will occur. Ex ante regulation to resolve what one thinks will be market failures is doomed to fail.
@Bennett Haselton:
“I think the best argument against kidney sales is that it might decrease public support for assistance programs for the poor, if kidneys become viewed as something that you could trade for cash.”
So, basically the state bans kidney sales because it hurts politician’s ability to buy votes by giving the poor a way out?
If kidneys were tradeable, they would be expensive (at least, let’s assume this for the sake of argument) This would put them beyond the reach of many people who needed kidneys. Jim the out-of-work Plasterer might need a kidney, but only be able to pay $20000 for one. However, if somehow he got one and it saved his life, he wouldn’t give it up for a million dollars. What, then, is the price of a kidney?
Didn’t Steve have a post once about Bill Gates and the pauper in the desert, arguing over a water bag, which he used as an illustration of when pricing mechanisms might break down. If this applies to the kidney market, it might be that removing the restriction on kidney trading might not instate a functioning price system.
“Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.”
Wasn’t that this year’s peace prize?
Harold,
but to be irrevocable you would have to sell yourself into slavery
Okay. How do I recover the 8 hours I spent laboring for my emploer today and use it for something else? I cannot. Labor performed in the past remains in the past. It is physically impossible to get that labor back.
How many of us would welcome higher blood pressure?
Again you fail to ask the correct question: at what price would person accept higher blood pressure. You merely assume that no gain in wealth is worth higher blood pressure, but that is clearly false as people day in and day out choose exactly that.
Ken agrees that perfect knowledge is impossible, so any market has built in failure to some extent.
I agree to no such thing. I agree that perfect knowledge is impossible, but I strenuously reject the notion that this “builds in” a market failure. Can you even properly define “market failure” or do you merely use that term for any market outcome you don’t like?
Additionally, Please tell me, why do you reject the fact that the people with the most knowledge and incentive to choose well (the patient) will somehow make a worse decision than the less knowledgable and poorly incentivized bureaucrat?
Mike H (37) – In the Bill Gates scenario both Bill and the pauper need the water (they’ll die without it). With kidneys there are some people who need them and some people who don’t. The story applies more to something like a market for hearts.
@Martin-2 #40 I don’t recall that Bill Gates was quite that desperate for water in Steve’s vignette. He was willing to sell it, after all, just not cheaply. It would be nice if I could find the link, or if Steve would weigh in and say if he thinks his vignette might apply in the way I suggest it might.
@Martin #40 Found it : http://www.thebigquestions.com/2010/09/07/efficiency-the-hard-cases/ Bill is not dying of thirst.
There are also health implications from having only one kidney, such as raised blood pressure. How many of us would welcome higher blood pressure?
So don’t sell it. Let the government give potential donors proper inforamtion. Alas, market failure gone…
I am not saying that a market would not be preferable to the current situation, but that regulation would be needed to reduce predictable market failures.
Ken agrees that perfect knowledge is impossible, so any market has built in failure to some extent. It is negligent to make no attempt to forsee these when introducing a new market.
Isn’t it negligence to foresee a government failure when trying to regulate the impossible-to-guess market failure?
Economiser: “Ken’s point is that the time you spend laboring for your employer can never be recovered.”
Ken: “Okay. How do I recover the 8 hours I spent laboring for my emploer today and use it for something else? I cannot. Labor performed in the past remains in the past. It is physically impossible to get that labor back.”
This is irrelevent. The past is past, so what? I am concerned about the future. Can you not see the difference? Go back to my slavery example. Selling a car is like taking a job. If you change your mind, you can reverse the choice with little cost. I could use the money I got from the car to buy another car, and be close to back where I started. I could leave the job, and be pretty close to back where I started. Selling a kidney is closer to selling yourself into slavery. Once I had decided to become a slave, I could not reverse the choice. I must remain a slave until death. Once I have donated my kidney (or whatever), I must remain without it forever. I cannot use the money I got from the kidney to buy another one and get back almost to where I was before.
Ken: “I agree that perfect knowledge is impossible, but I strenuously reject the notion that this “builds in” a market failure. Can you even properly define “market failure” or do you merely use that term for any market outcome you don’t like?”
I can indeed define market failure. A perfect market will allocate resources in the most efficient way. This means roughly that we cannot make anyone better off without making someone else worse off by a greater amount. The great thing about the market is that we are not saying someone is better off financially, but that they are better off according to their own preferences. So a perfect market results in the best outcome according to everyones own preferences.
If we deviate from the results a perfect market would produce, I define that as a market failure.
Since a perfect market requires perfect information, and we both agree that perfect information in impossible, it is inevitable that we must deviate from the results a perfect market would produce. Therefore market failure is inevitable.
Perhaps you have a different definition?
In most markets, we cannot do better than the approximation to the perfect market we get in reality. So the toothpaste market is not perfect, as discussed in an earlier post, but any attempt on our part to improve it would very likely make things worse. I would therefore recommend leaving the toothpaste market to itself.
The consequences of the inevitable failure in a kidney market are likely to be greater than for toothpaste, so it would be pertinent to do what we could to minimise them.
Harold,
This is irrelevent.
It most certainly is not. This forms the bedrock of what’s known as opportunity cost and trade offs.
I am concerned about the future. Can you not see the difference?
Can you? You talk about the irrevocability of selling a kidney, but want to declare that selling labor is not. You claim that selling a kidney today is irrevocable tomorrow and for all time, but the labor I sell today isn’t and even if true is somehow irrevelevant. The point that Bennett was trying to make is that for him it’s icky that the less well off would have the audacity to try to make their lives better off by selling a kidney if there was a kidney market. I rightly pointed out that this is the same as being disgusted that a less well off person would work more than 40 hours per week to try to make their lives better. Then you try to claim that the two cannot be comparable because one is irrevocable, while the other is not, but this is clearly false, as the past is irrevocable, so my labor is irrevocable.
Selling a kidney is closer to selling yourself into slavery.
This is absolutely false. Slavery is forced uncompensated labor. Voluntarily selling a kidney is nothing like that.
Your point is that selling a kidney is supposedly different from selling a car because of the costs associated. But you are ignoring the most important part of the transaction: if you sell your kidney you will be compensated. In fact you will be compensated up to costs you consider important that are associated with selling the kidney, otherwise, you will lose out. Since you don’t make trades on which you will lose out, you won’t sell your kidney if you aren’t compensated enough.
The funniest, and saddest, part in all this is that you worry about all these problems for people selling kidneys, but think these problems don’t exist for those that donate free of charge or are simply unimportant for the donation market. The entire point of free markets is to eliminate and minimize the very problems you are talking about. Kidney doners right now aren’t compensated for any of the losses you are worried about. Just exactly how will getting compensated for a kidney make people worse off rather than simply giving it away?
Also, you completely ignore the benefits to the kidney recipient. The kidney seller is made no worse off due to compensation he receives for the kidney, but the kidney recipient is made extraordinarily better off. Do you really think it’s better that 116,000 people not get kidneys than to allow them to buy kidneys because you think somehow the sellers can’t possibly know the risks, despite being the ones most affected, therefore have the most incentive, to find out what those risks are and to insist on being properly compensated?
A perfect market will allocate resources in the most efficient way.
Wrong. A market failure is not a failure to allocate resources in the “most” efficient way. A market failure is a failure to allocate resources efficiently. Since every market can be made more efficient, under your criteria, all transactions would be considered market failures. You really shouldn’t base arguments on things that you can’t even define.
If we deviate from the results a perfect market would produce, I define that as a market failure.
Exactly. Then for you everything is a failure, including government. Absolutely nothing is perfect, so everything, by your own definition, is a failure. There is no such thing as a perfect market for anything. It’s a fiction you’ve created.
Perhaps you have a different definition?
Yes. The correct one. A market failure is one in which for one person to be made better off, another must be made worse off. In other words, for there to not be a market failure simply requires a person to be made better off, without making someone worse off, which means nearly all market transactions are not market failures. At no time does this mean that the trade is the best trade available. It simply means the trade is better than not trading.
any attempt on our part to improve it would very likely make things worse.
Pure conjecture. And even if it were true, in a free market anything that makes things worse off loses money and ends quickly. Markets are systems of profits and losses. The things that make things better are profitable and stick around. The things that are losers go away, unless the government props it up.
The consequences of the inevitable failure in a kidney market are likely to be greater than for toothpaste
How do you know this? If there was some sort of system risk in the toothpaste market that caused a loss of $50B and the loss due to system risk in the kidney market is $50B, which market failure is greater? Without having actual numbers, saying one is worse than the other is simple non-sense.
If we deviate from the results a perfect market would produce, I define that as a market failure.
@Harold: It seems to me that free kidney market would be huge improvement; it might allocate something less efficiently, however it still would be a huge improvement compared to current situation. So why is the fact that it allocates worse than some ‘perfect market’ relevant?
Are you saying that by ‘properly regulating the market’ we could do even better? Maybe yes – but why should this be the reason not to allow the free market without regulation?
Since a perfect market requires perfect information, and we both agree that perfect information in impossible, it is inevitable that we must deviate from the results a perfect market would produce. Therefore market failure is inevitable.
Well, since perfect regulation requiers perfect infromation, we both agree that perfect information is impossible, it is inevitable that we must deviate from the results a perfect regulation would produce.
Therfore government/regulation failure is inevitable.
Ken. Slavery is not uncompensated if you sell yourself into it – the compensation happens up-front. Perhaps slavery is too emotive. Lets say that you take an employment contract for 100 years for a lump sum. Any breach on your part will be dealt with by execution. This is irrevocable in a way that taking a job in the normal manner is not. Surely you can see that this is irrevocable in a different way than yesterday is? One is unchangable because it is in the past, the other is committing you to a course of action for the future. Please note that I am not saying that such an irrevocable deal must always be to your disadvantage, but pointing out that it is very different from the irrevocable nature of the past, which makes the consequences of a mistake much more serious.
Ken: “Yes. The correct one. A market failure is one in which for one person to be made better off, another must be made worse off.”
Harold: “This means roughly that we cannot make anyone better off without making someone else worse off by a greater amount.”
Compare our definitions and you will see they are the same.
A perfect market will result in Pareto equilibrium, defined as we both did above. Since Pareto equilibrium results from a perfect market, any imperfection will result in an outcome that is not at Pareto equilibrium. If we are not at Pareto equilibrium, then someone could be made better off without making someone else worse off. So yes, every real market is a failure on the definitions we both gave. Your later definition that it is not a failure if both parties are better off after the trade is not the same at all.
“It’s a fiction you’ve created.” I have not created it, and it is not a fiction; it is a model, or an ideal. I can talk about ideal gases, whilst realising that all real gases deviate from ideal behaviour. This does not make the concept of ideal gases a fiction, and certainly not one I have created. The same is true for perfect markets. It does no good to just wish away the deviations, and say “well, since no market is ideal, lets call what we have ideal instead”.
“Pure conjecture. And even if it were true, in a free market anything that makes things worse off loses money and ends quickly” I may have expressed myself badly. I intended to say that in the toothpaste market, we are better off accepting the imperfections than we would be to try to interfere in the market. It is conjecture, but one I think you would agree with. We could try to eliminate market failures by legislating how much shelf space is allowed, or banning payments by manufacturers for a better display position, or banning anything but strictly informative advertising. I suspect that such efforts would end up doing more harm than good, but it is merely conjecture.
“How do you know this? … Without having actual numbers, saying one is worse than the other is simple non-sense.”
Good point. Well, it may not be definite, but I hope it is better than nonsense. It is possible that the costs of imperfections in the toothpaste market add up to more than the cost of imperfections in the putative kidney market, but it is very likely that the costs per transaction are very much lower. Our efforts to correct market failures will not be 100% effective – each will have a cost as well as a benefit. If we try to correct for a small error in a large volume of trades, the costs are likely to be much higher than the gains. This is why we should leave toothpaste alone. However, if we try to correct for a large cost in a small number of trades, the benefits of interference have a greater chance of outweighing the costs. My contention is that the kidney market would have a higher cost of failure on smaller number of trades.
I would be grateful if you, or anyone, could point out any errors I have made. What I am saying seems reasonable to me, after much thought, but it is possible I have missed or misunderstood something.
If body parts were tradeable, they could be seized by debt collectors or through Eminent Domain. The last one is particularly scary, because Congress would not have the authority under the Constitution to stop a State from using Eminent Domain to take organs, if those organs could be sold. This is why it is an all or nothing proposition. If organs are considered property, they can be taken involuntarily from anyone who happens to be politically disfavored at the moment.
andy: Both good points. The costs of the market failures are uncertain. Maybe a free market would be better than today, but how do we know? We must make a judgement. Back at message 9 I had a look at the WHO reasons for not allowing a market. It seems very likely to me that these can be mitigated sufficiently with regulation to give a net benefit. Without mitigation, who knows?
And yes, perfect regulation is impossible also. I say above that any regulation will have costs as well as benefits, so should be avoided unless we have reason to think the balance will be positive. I think that in this case the balance would be positive.
Harold: ” Maybe a free market would be better than today, but how do we know?”
Experience?
Harold,
Compare our definitions and you will see they are the same.
Harold’s definition: If we deviate from the results a perfect market would produce, I define that as a market failure.
Economist’s definition: A market failure is one in which for one person to be made better off, another must be made worse off.
Yes, let’s compare these two definitions. Your’s explicitly states anything not perfect is a failure. Mine does not. It defines a market a success if someone can be made better off without having to make someone worse off.
A perfect market will result in Pareto equilibrium
But Pareto efficiency doesn’t imply “a perfect market” and only Pareto efficiency is necessary for there not to be a market failure.
we are better off accepting the imperfections than we would be to try to interfere in the market.
This is true for all markets, not just the toothpaste one. You act as if there are no imperfections in legislation or that the imperfections in legislation are somehow less bad than what might be seen in markets, but this is untrue. Imperfections in legislation must be followed no matter what, otherwise fines are levied and jail time is often threatened. Imperfections in the market lead to loss of profit and sometimes bankruptcy.
You seem to just assume your conclusion, again. You simply assume that government failure will be less than market failure. But of course as the last four years have shown, and much of the twentieth century, nothing is as catestrophic as government failure.
t is very likely that the costs per transaction are very much lower
This isn’t what’s important. The expected costs per transaction are what’s important (having a 10% chance of losing $100 has the same expected loss as having a 0.1% chance of losing $10,000). And even this may not be as important as total costs versus total benefits.
My contention is that the kidney market would have a higher cost of failure on smaller number of trades.
I would be grateful if you, or anyone, could point out any errors I have made.
The first statment from the above two sentences is the main point of error you’ve made. You contend this, but don’t back up this claim with any numbers. You simply assume your conclusion, then argue as if your conclusion is solid fact. You contend that a free market for kidneys will have higher costs than benefits. This may be true, but this has yet to be shown. What we do know is that the costs for a ban on selling kidneys definitely have higher costs than the benefits. Those who need kidneys will live in misery and die much younger than needed because of the severe shortage of available healthy kidneys. What are the benefits to the ban? That some people, like Bennett, don’t have to confront their “ick” reflex? Are there any others?
So even if the costs of free markets in kidneys is greater than the benefits of a free market in kidneys, it’s still possible to have a lower net cost of a free market in kidneys compared to the net costs of a complete ban on selling kidneys. Cost benefit analysis is only relevant if you have things to compare. Saying the costs of some situation X have costs, C(X), and benefits, B(X), is pretty useless unless you have another situation Y, and associated C(Y) and B(Y). Only if B(X)-C(X) is greater than B(Y)-C(Y) can you claim that situation X is superior to situation Y.
Ken. I am particularly interested in our definitions of the outcomes. I interpreted them as the same, but I may have been mistaken. My definition is that the outcome could not be made any better. Any change to the outcome must make someone more worse off that it makes someone else better off. (apologies for the clumsy phrasing)
If I have it right, your definition is that it is a success if it makes someone better off than they were before the trade, without making anyone worse off. These are indeed very different. Your definition allows for potential outcomes to be even better.
My understanding is that a perfect market will result in my definition of the outcome. This will also fit your definition, which is a less rigorous version.
A less tha perfect market can result in an outcome that fits your definition, but this outcome could be improved upon. By your definition, we can never know if we are anywhere near the best outcome, just that we are better off than today.
A simple example. You have carrots to sell, I want to buy carrots. In a perfect market, there will be a price, and I will but the appropriate quantity. No other quantity or price could leave you and I anyy mor esatisfied. This is my definition.
If i have it right, your definition is different. If the state imposed a price, then I will buy some carrots and you will sell some carrots. I will be better off, because I have some carrots. You will be better off, because you will have some money. But neither of us will be as well off as we would have been.
It seems to me that the whole point of the exercise is to determine what the best outcome could be, not one aof an infinity of inferior outcomes that are a bit better than before.
I think the main difference in our thinking is that I am saying “worse off than they could have been” and you are saying “worse off than before the trade”. i think I have the correct version, but am prepared to be corrected.
“This is true for all markets, not just the toothpaste one” I guess we are both assuming our conclusions.
Sorry for the long response, but I do not have enough time right now for a short one.
Typo – in the carrots example the last line should read “neither of us is as well of as we could have been” i.e we are better off than we were before the trade, but not as well off as we would have been with a perfect market.
Harold,
You’re claiming that non-Pareto efficiency is my definition of market failure. It is not. It is the actual definition of market failure as used by economists with regards to markets and economics. It is a rigorous and well known definition that allows people who understand the definitiont to discuss what a market failure is and what causes them.
It seems to me that the whole point of the exercise is to determine what the best outcome could be, not one aof an infinity of inferior outcomes that are a bit better than before.
This is the very purpose of free markets and the supply and demand curves. Using free markets, the price will converge, and rather quickly, to the intersection of the supply and demand curve, as proved by Vernon Smith. That the price determined by the intersection of the supply and demand curve is the best one can be found in any introductory economics text book. That anything other than free markets can find that intersection is a pipe dream. Government intervention by design changes the price away from what would naturally be chosen, so the price at the intersection of the supply and demand curve will never be found.
Government price controls are an excellent example of very bad legislation. Look at what happened to the availability of gasoline when Nixon imposed price controls and the next two presidents added even more complexity to this system. Long wait times and unneeded scarcity occured. By keeping prices artificially low, producers either didn’t know to or couldn’t afford to produce more gasoline. Since the prices were so low, there was no incentive for consumers to economize on gas; in fact, due to the long wait times, the low prices simply encouraged consumers to buy all that they could afford as soon as they could regardless of whether or not they actually needed the gas. Since the cost of gas wasn’t allowed to be known through price mechanism, the cost showed up elsewhere, namely long lines and going without.
Prices are a signalling mechanism used to let producers and consumers know the scarcity of something. Upwards moving prices encourages producers to produce more and consumers to consume less. The opposite occurs when prices drop. When government distorts prices, it automatically causes a non-optimal solution, the “best” solution as you would term it.
As for the ban on selling kidneys, the government has decided to make the price artificially very low (free in fact), with predictable results. Of course, everyone knows that nothing is free. As with the price controls keeping the price of gasoline artificially low, the price control on kidneys produces a shortage. Since the price control keeps the price artificially free, the shortage of needed kidneys is especially severe. The only way the government could lower the price even further would be requiring kidney donors to pay the recipients of the kidney, but I assume even you know that this would make kidneys even more scarce.
Harold, I don’t get your post No.9. If information-assymetry would be a problem in a free-market, how it is not a problem right now? What’s the difference? Do you oppose _any_ scheme that would lead to singificantly higher kidney donations, because there would be presumably more cases of wrong decision? Aren’t you confusing problems arising from higher volume of transactions with problems arising from free market? Anyway, is there a problem with government informing the people? I guess one concise paragraph of information would probably fix the alleged problem….
As for human trafficking – this is simply false, it would _decrease_ if kidneys were legalized. Btw: I was told by a friend in Brasil that it sometimes happens people happen to wake up in a ditch with a scar on their back. This is one of the costs of prohibiting free kidney market, which would likely decrease if free market was enacted.
As for profiteering and exploitation of the poor – it seems to me, again, that this is more likely idiomatic to _any_ system that would include high volume of kidney ‘transactions’, regardless if it is free market or not. Are you against raising the number of transplants?
Ken: OK, I was right the first time. We do share the same definition of market failure, but you have not realised it. This may be due to bad explanation on my part, so I will try again.
Slightly paraphrasing your words “When government (or anything else) distorts prices, it automatically causes a non-optimal solution.”
You agree that Pareto equilibrium is the outcome of a free market, and also that it is the best outcome that can be acheived. Any outcome that is not at this well defined point is a market failure. If a govt intervenes in a free market, the equilibirium MUST shift away from the Pareto optimum. Are we in agreement so far? I think this is uncontroversial.
However, it is not just Govt intervention that can cause the outcome to shift away from the Pareto optimum. Any interference in the free market will do this. I think that this is also uncontroversial. There are well documented mechanisms of market failure that have nothing to do with Govt.
I look up “Pareto Efficiency”, and I find that one of the requirements for a free market to arrive at Pareto eqilibrium is perfect information. Therefore, in the absence of perfect information, we will not obtain Pareto optimum. So far this all seems entirely logical and inevitable from basic economics.
So it seems that you would have to agree that we will not acheive Pareto equilibrium in any real market. By your statement of the economists’ definition, this is a market failure.
Since all real markets fail, we are no longer dicussing whether there is a market failure, but whether we can improve on the failure to bring us closer to the Pareto equilibrium that we all agree is the best outcome. You seem to have assumed that any Govt. effect will only ever take us away from the Pareto equilibrium. This IS true if we are actually AT the equilibrium point. It is NOT true if we are removed from that point. Any action could take us either further away from or closer to our desired outcome.
A well known case is for externalities, where I think it is pretty widely accepted by economists that Govt interference to tax negative externalities can bring us closer to the Pareto equilibrium we all seem to want.
andy (and Ken B) I have addressed the issue of how to make the kidney system better in a way that would reduce the objections to a market. The objections are not all completely groundless, and it is therefore possible in principle to improve on an unregulated market. The magnitude of some of the “downsides” to the free market are difficult to measure – what is the cost of “conveying the idea that some persons are mere objects to be used by others?” I don’t know. Suffice to say, some influencial people seem to be setting a very high value on them. So rather than ignoring them, I was attempting to address them.
So to some extent I have not dealt with Q1: “would an unregulated market be better than today”, and addressed the question Q2: “would a regulated market be better than an unregulated one”. If the answer to Q2 yes, we can then ask if the regulated market will be better than today. If the answer to Q1 is yes, then the answer to this question must be yes also. However,the answer to this question could be yes, even if the answer to Q1 was no.
Since we do not currently have a kidney market, the objections must be strong enough to overcome the arguments in favor of such a market. In effect, people are assuming that the answer to Q1 is No.
O’Brien,
We do share the same definition of market failure, but you have not realised it.
1. If we deviate from the results a perfect market would produce, I define that as a market failure.
2. A market failure is one in which for one person to be made better off, another must be made worse off.
The same? It’s impossible to engage in honest debate with people who use doublespeak or refuse to acknowledge that words have actual real meaning.
what is the cost of “conveying the idea that some persons are mere objects to be used by others?”
I think the question is if you would vote for having these people be considered unable to make legal acts (not sure what the term is in English). It seems to me quite a bold idea saying ‘I think you are stupid, so I will not grant you the freedom to sell your kidney’…which is basically what this kind of arguments eventually leads to.
Q2: “would a regulated market be better than an unregulated one”.
No.
Yes.
Bad question; “a regulated market” can be worse than an unregulated one. A different “regulated market” could be better. Q2 is irrelevant.
“Is there a regulated market, that is better than an unregulated market?” Sure; this is called utopian fallacy.
What about coming with a relevant question first?
To Harold’s point about irreversibility and the difference between selling a kidney and selling a week’s worth of labor, I think an illuminating way of thinking about this is not irreversibility per se, but “lumpiness”. A 20 year old starting his career has say 45 years worth of labor to sell, and he can sell it a little bit at a time, evaluating the results to see if he liked the deal, changing his price up or down etc. However, he only gets one shot at selling his kidney. Obviously the consequences of a mistake in price are much greater. The two would be more nearly comparable if you could sell your kidney one nephron at a time.
I’m sympathetic to the view that the market will adjust to this though — risk-averse people generally won’t sell their kidneys. I actually don’t know if the price of a kidney would be particularly high, at least once the existing backlog is cleared out I’d expect demand to be fairly low. How many new patients require a kidney transplant per year?
SL: “So Alvin Roth wins the Nobel Prize for… figuring out the best way to allocate kidneys subject to the constraint that you’re too damned dumb to use the price system.”
In case you missed it, your buddy David Henderson agrees:
WSJ-Noble2012
oops
Try:
http://tinyurl.com/WSJ-Noble2012
Ken. I have been through this before, but I will have another go. The definitions you quote above are different because the second one makes no sense as a definition of market failure. I made the error of charitably interpreting it, and making assumptions about what you actually meant.
Take the one you quote above: “2. A market failure is one in which for one person to be made better off, another must be made worse off.”
It seems to me that this is a stab at a definition of Pareto optimum, although I think it is usually phrased in the negative, i.e. no exchange is possible that would make one person better off without making someone else worse off. The bit that says “no exchange is possible” is important, because it shows we are comparing things to the best they could be, not what they happen to be now.
Taking your definition at face value. If we are away from the Pareto optimum, we can make someone better off without making another worse off. You define market failure as one in which for one person to be made better off, another must be made worse off. In order for your condition to apply, we must be at the Pareto optimum. So a market failure is one in which Pareto optimum has resulted.
Since this is the exact opposite of the usual definition I interpreted this to mean that a market has failed if it does NOT produce the above outcome.
It seems to me that we either have a definition which is the opposite of the usual one, or a badly phrased one that is the same as mine.
There is another interpretation. That is that a succesful market is one in which one person can be made better off than they are now without making anyone worse off. This means that a market will not suffer from market failure as long as things incrementally improve, even if there are much more efficient ways to allocate resources. This could be a definition of market failure, but I am pretty sure it is not the one the economiists use. That is why the part in the definition of Pareto equilibrium about there being no Pareto adjustments possible that… is so important.
Another way. A market failure is one that is not Pareto optimal. Is that OK? This is a very clear, unambiguous definition. That is from wikipedia. Another definition from something called “investopedia”
“An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.”
You will note the “lack of economically ideal factors” in there.
But you have described market failures in other terms also. This is the section that made me think we were using the same definition:
Ken: “Using free markets, the price will converge, and rather quickly, to the intersection of the supply and demand curve, as proved by Vernon Smith. That the price determined by the intersection of the supply and demand curve is the best one can be found in any introductory economics text book.”
You appear to be saying that the outcome of the supply and demand curve that occurs with a free market is the one to which we should compare our actual outcome. This is the same one that I am using. But to arrive at this optimal outcome the market must be “free” under strictly defined terms. One of these is perfect information. I am not making this stuff up, you can go and have a look.
I may be wrong, but it seems that you are equating “free” in the sense of not having any Govt. interference with “free” in the sense of having no impediment to perfect functioning. In economic terms, it is the latter that is correct.
Pretty much every country in the world is “too dumb” to use the price mechanism to allocate kidneys except the wonderful Islamic Republic of Iran. Apparently there isn’t a waiting list for kidneys in Iran.
“I may be wrong, but it seems that you are equating “free” in the sense of not having any Govt. interference with “free” in the sense of having no impediment to perfect functioning. In economic terms, it is the latter that is correct.”
Exactly, a common mistake. Fair market is probably a superior term.