Russ Roberts

Satz on Markets

EconTalk Episode with Debra Satz
Hosted by Russ Roberts
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Debra Satz, Professor of Philosophy at Stanford University, talks with EconTalk host Russ Roberts about her book, Why Some Things Should Not Be For Sale: The Moral Limits of the Market. Satz argues that some markets are noxious and should not be allowed to operate freely. Topics discussed include organ sales, price spikes after natural disasters, the economic concept of efficiency and utilitarianism. The conversation includes a discussion of the possible limits of political intervention and whether it would be good to allow voters to sell their votes.

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0:36Intro. [Recording date: July 25, 2011.] Book on the moral limits of markets is very provocative in the best sense of the word. You start the book by criticizing the sterility of how markets are viewed by modern economists relative to classical economists--Adam Smith, David Ricardo, Karl Marx. What do you think is wrong with the way modern economists look at markets? I have a number of places where I think that the modern view has lost some of the insights of the earlier view. The first thing is that modern economists tend to treat--this isn't completely true--all markets as the same. So, they are more interested in the quantitative properties of markets--equations that you can use to write down the supply and demand curves--and less interested in the qualitative dimensions of markets. I think that's a mistake, because I think in the abstract you are losing some information that you need about particular markets. So, in my book, I explore the qualitative dimensions of markets that people respond to intuitively. So, intuitively, people have very different reactions to markets in body parts than they do to markets in automobiles, even though all of these things can be represented by the same set of equations. There is an intuitive disgust or abhorrence to certain kinds of market transactions; and what I'm interested in is seeing what in the concrete, in particular heterogeneous markets, what can be said on behalf of some of the intuitive reactions people have. One of the most important examples you give is labor markets. Certainly, we can draw supply and demand for labor; wage rates that result if there is competition. But you argue that labor markets are very different. In particular, you give other examples throughout the book--labor markets are particularly important to be treated in a different way. Right, so one of the things about an apple market is we don't tend to think that the buying and selling of an apple and the way it's bought and sold has a lot of consequences for the nature of the apple. I can pick an apple, I can buy it from the guy across the street, I can buy it from the organic grocery: an apple is an apple. But the conditions under which labor is bought and sold can have effects on the laborers themselves. So, for example, lots of literature this century but also among the classical political economists looked at the effects of certain ways of organizing the labor market on the skill set of the workers themselves. So, if a labor market promotes the skilling or lack of education then we have reason to be concerned about that market in a way we are not concerned about the deskilling of apples. Although if you are Michael Pawlyn and interested in food you might be worried about the way apples are produced. Maybe chickens, but maybe not apples either. And you give an example--Adam Smith was very aware of this and talks about it quite a bit in The Wealth of Nations and some in the Theory of Moral Sentiments. He's obviously extremely concerned about the large group of people who were workers in his day and the impact of various policies and competitive aspects of markets. Right. So, Adam Smith, who is sometimes viewed as an unquestioning proponent of markets and an opponent of market regulation actually has a much more sophisticated view and one of the things you see in the Wealth of Nations is his concerns about the deskilling of work, about the conditions of work; and at one point he says that in the modern pin factory, in effect, you are making workers as much as making pins. And you can be making workers in ways that are not so compatible with ways of making those workers participants in public life as responsible citizens. And therefore we need the state to intervene. For example, to provide education. David Ricardo worried a lot about land markets and had the view that land was very different than other kinds of commodities. In particular land's value doesn't have anything to do with productive contribution. Land grows more scarce, its marginal value goes up, even though the entrepreneur may be adding nothing. And of Karl Marx thought a lot about, in particular, labor markets. You mention Adam Smith, and we've talked a lot about specialization on this program and we've talked about the pin factory more than once--I would say the cultural condemnation of the power of specialization. The most dramatic example is "Modern Times," Charlie Chaplin's movie where a worker who is highly specialized does the same dull, repetitive activity over and over again. For many people it would be degrading for that to be your best alternative--maybe not for everybody. Some people might like a mindless job, but many people of course do not. What strikes me is how much the world of specialization has changed over the last 250 years. You make a number of observations about how class conscious Smith and certainly Marx were. They lived in a time when there was a lot less mobility between classes. And then you think about Smith and the pin factory; but that Charlie Chaplin movie is chilling to I think anybody. Yet in today's world, specialization can be something really glorious and wonderful. You are specialized in ethics. Doctors specialize in a tiny, maybe one disease; biochemists specialize in one protein or one process. They don't find their life dreary and boring. One view is that some of these social phenomena forces are time-specific. I also want to make a distinction between specialization and deskilling. So that specialization as you say is necessary in a modern, complex world where there is just too much information for anybody to do everything well. But the doctor who specializes in cancer or the philosopher is not functioning at the skill level of a non-functioning machine. And the Charlie Chaplin movie, and the pin factory as Adam Smith paints it--you really have people in effect acting as what Marx once referred to as appendages to machines. There's nothing of their human capacity to make and do and be that's being called for. But of course, the irony is that because of that, so many of those processes we've taken the human component out. We've substituted smart machines, robots, for other things. Which has the virtue of not having those opportunities available to people to becoming machines and the negative that they don't have that opportunity. Right. That transition is obviously a challenge.
8:54One of the things you criticize in the book about modern economics which I wholeheartedly applaud is your, I would say, disrespect for efficiency as a decisive argument. So, why don't you talk about what your complaints are about efficiency and what you think economists have missed there. I should say: I'm not a fan of inefficiency. But I think it's a more limited notion than economists have recognized. And in particular it's normatively limited. So, the first thing is that efficiency is always relative to some background starting position. So, if the background starting position is very unequal, an outcome can be efficient but highly morally questionable. So, Amarty Sen gives the example of: imagine a society in which there are some billionaires and some people who are desperately poor. Well, if you take the Paretian notion of efficiency based on Pareto efficiency, then it's inefficient to transfer any resources from the billionaire to the desperately poor. Because it would harm someone. Because it would make somebody worse off. So, if you think of the Pareto idea of efficiency as reaching a point in which nobody can be made better off without somebody being made worse off, we'll start with the billionaire and the very desperately poor person; if the only way to make the desperately poor person better off is to take a dollar from the billionaire, then Pareto efficiency would condemn that as an inefficient arrangement. Yet many people would think in a circumstance like that that a transfer from the billionaire to the desperate is of course justified. So, it's a narrow notion, normatively from a moral point of view. There will be a lot of social arrangements that are criticizable even though they are efficient. So, I think saying something is efficient--first of all, it's efficient with respect to what? And then I also in the book worry--so one way we talk about an arrangement being inefficient is to say--so a standard way of thinking about inefficiency is to say markets can be inefficient when they generate third-party effects. Externalities. When they make a third party worse off. The problem is the notion of externality is actually an under-theorized idea in economics. Because if you think about it, there are very few transactions that don't make somebody worse off. In a complex world you build a road, and some old business on an older road gets hurt; you build a skyscraper, you block the sun of somebody's apartment. Read a book. An example you gave which I always give to my students--does that give you moral grounds for you to intervene in my book choice, my Netflix queue, my etc. So, if you are thinking about setting social policies you need more than just the notion of inefficiency and externality in order to think about what to do. So, part of what I want to do is just open up. It's not rejecting or throwing over these notions. It's sort of opening them up and first of all saying what kinds of externalities are we to care about. And if efficiency isn't the sole value that we ought to think about when we are thinking about markets, what are the other values that are important? I agree overwhelmingly with almost all that. I do think the profession has oversold--and for those listening at home, efficiency is a technical piece of economic jargon. It isn't the everyday use of the word we often think of like the economy is working well. They can be correlated--inefficient economies and inefficiency in the jargon sense. But it's usually used in a very specific way in economics. One way is the way you mentioned, the Pareto criteria. It would be inefficient if somebody could be made better off without making someone else worse off. The other way to think about it is--the claim is made that an efficient market maximizes net benefits to all involved, or a certain intervention would be inefficient because the net gains are smaller than the net losses. I used to teach that way, incidentally; very much part of the Chicago tradition. Deadweight loss is the term for these net losses. And I stopped teaching it maybe ten years ago for two reasons. One is I didn't find it persuasive as a normative tool. And I think most economists just treat it as open and shut, which is absurd. The second is: It's fundamentally utilitarian, and I've increasingly been uncomfortable with utilitarian measures as guidelines. So, I would defend the concepts of externality and efficiency as helpful ways to organize your thinking, but certainly not rules or absolute guides. So, for example, in the case of efficiency, to me, the right way to think about it is: if a policy is inefficient it means the pie is not as big as it could be. So what? Many of us would feel overwhelmingly about the justice of a move that made the pie smaller but changed how it was distributed in various ways. I'll come back and we'll give some examples where we'll see how much we agree on some of those policies. I just think economists oversell it as some kind of a magic elixir for policy judgments, and I certainly agree with you that it's not.
15:14Let's take some examples from the book and talk about some of the critiques you bring of economics; and more accurately, some of the critiques you make of leaving things to markets and see what the arguments are. One great example you take, I think from Thomas Schelling, although he may have gotten it from somewhere else, is the Titanic. So, talk about the Titanic and what we learned from that. So, it is a Schelling example and I think it's a very thoughtful example. I've thought a lot about it and I don't have a fully satisfactory account of what's going on in this example. But Schelling asks us to think about the distribution of access to lifeboats on the Titanic. So, on the original Titanic you could purchase a seat with access to a lifeboat, or a third-class seat which did not come with sufficient lifeboat space should anything happen in the boat. Now, of course people thought the boat was unsinkable. Lifeboats were just decorative anyway. But of course it turned out not to be true. And so imagine not the actual Titanic; but now we know there is a risk involved. Do we want to be a society that builds boats where some people on the boat will have to go down with the ship where other people will be able to purchase some level of safety? One of the things Schelling asks is: Do we want to be on that boat in the lifeboat when somebody else is struggling overboard? Some people would find that an easy question to answer--they'd say yes. But would there be some discomfort and feeling of shame, disgust, horror that your income was sufficient to save your life and other people's wasn't. You give the modern example, which I think was very appropriate, of if rich people can disproportionately purchase large Sports Utility Vehicles (SUVs) and other cars, and more expensive, and poorer people are more likely to be buying lightweight cars and more likely to be crushed in an accident. How do we feel about that? Is there a role for the state in making those choices or should we just let people sort and make their own choices? And Schelling says something very interesting at the end of this essay. He says maybe somebody given the freedom wants to buy a ticket without a lifeboat, maybe we shouldn't prevent them. But maybe they should have to build their own boats. So, if you could imagine, maybe we'll have two boats, or two societies, one in which lifeboats are provided for everyone and one in which some people sail off without security. The other example that came to mind--and we are not going to have time to go into all the details but you do a superb job in giving all the standard economists' arguments, most of them, on the other side. The idea that people should be free to make their own choices; the idea that people should be informed. And if they choose when informed not to buy the safer thing, the argument that maybe you should give people cash. They are the best judge of whether to buy the safety or not. So give them the cash; if they then choose to buy the less safe seat because they'd rather have the money for something else, then maybe should respect that. You go through most of what I consider the standard arguments in economics and you do a very good job and interesting job disagreeing with those. But I want to take a modern, even better example than the cars, which is airline safety. So, right now we have a system where the government has decreed that we are all equally safe--or unsafe, as the case may be. We're forced to go through this Transportation Safety Administration (TSA) process if we want to go on an airplane. As a classical liberal my preference would be that airlines should be free to choose for themselves, and customers can then sort accordingly. So, some airlines might choose one level of safety; some airlines might do all kinds of scanning, including intrusive scanning you might not choose to be part of. Others might just pass out guns to everybody. Or box cutters. We can imagine a large range of choices. So, one argument is let those choices work. If you get on that plane that's true, in the Schelling sense. You are not on a plane where half the people have parachutes and other people don't; but there's choices between planes in terms of expected outcomes and safety. Do you think that's a bad idea? Does that make you uncomfortable? So, that is the Schelling idea: let people have their choices. In theory I don't think it's a bad idea in part because I also share your value of choice and enabling a wide range of choices. I do worry about if you make some choices available to people that are actually really harmful, you'll wind up in situations where sometimes people feel more compelled to make those choices. So, imagine you've made the boats and you can go on either boat, but some people are really poor. So there's going to be a lot more pull for them to take those boats. You might end up unraveling a little bit of the safety net that you thought you provided by giving the other option. Because the economic pressure is going to be very powerful; and you are going to get crashes and bad outcomes that are going to be very depressing to the third party, those of us on the outside who weren't involved in the choice, which is going to motivate us to influence that choice. And there will be other issues, like will people be able to take their children on any kind of plane that they want? I think in general if you could really arrange the world so we could have a lot of different experiments going on and we had competent adults making various kinds of choice and there were no interaction effects, I have theoretically no problem. It's just that I worry that there will be all kinds of interaction effects.
22:21Let me raise a bigger criticism of your approach, a more general criticism, which is: In any of these cases, and let's just take the simplest example, where is discomfort by third parties about the transaction--whether it's high prices for a particular product after a natural disaster, child labor--you give a whole range that we find discomforting as bystanders. Not as transactors. Clearly we both understand and agree that there are a lot of voluntary transactions where both parties want to make the transaction and we know that people would want to stop that transaction who are not party to it. And that's what I want to focus on. Recent podcast with Mike Munger on whether voluntary exchanges are actually voluntary. My question is this: You point out, I think 100% correctly that people are discomforted by these transactions, which gives a justification for state intervention under certain circumstances. Do you have a theory of the state to go alongside with that? We have markets which don't work the way they work in textbooks. I think good economists are aware of that. Bad economists--they hew to a very sterile line of efficiency. I think good economists know markets don't always work so well. Governments don't always work so well, either. So, talk about the effect that has, if at all, on your normative views. I do say in the book that always when you are assessing an institution, you need to assess it against alternatives. So, you might think an institution doesn't work that well, a market doesn't work that well; but then the obvious question to ask is what are the alternatives and do they work better? You want to think broadly about that, rethink a lot of the institutions; but you still have to think about what are the possible alternatives. If there are no possible alternative that's better then I think we are stuck with the not-so-good alternative we have; and one of the things I talk about in the book is sometimes you have a problematic market and you are tempted to close it down because it's an awful market. Child labor would be an example. But supposing you are in a society where the only alternative is to close it down and have a black market where the lives of children are far worse? Then I think that's relevant to what you should do. It doesn't change the assessment that the child labor market is problematic, but it does lead you to think: Well, I don't have a viable alternative here. In some cases, government is too weak to close down, to shut down a black market. Often. In the United States we do a pretty good job, so child labor is not a widespread practice in the United States. Not much demand for it. Where there's a lot of demand, like for cocaine, we don't do much. Well, drugs is a good case; and that might lead somebody to think there's an argument for deregulation of drugs, period, because making it illegal hasn't shut down the flourishing practice. I wanted to get back to one thing you said, though. My view isn't that the moral distaste people have is grounds for government intervention. That's what I worry about--externality is too broad. Because I don't want it just to be the fact that people disagree. It's got to be the fact that people are actually harmed. Need some conception of what a harm is. So, in the child labor case, what I'm interested in is: If you allow a practice of child labor, and let's say you have the view of willing buyer, willing seller, there is a third party cost, because a widespread practice of child labor changes the price of adult labor and therefore makes it harder for families who don't want to put their children to work to be able to do that. So, they pay a cost. I'm interesting in thinking about harms; and then of course you need a theory of harms. But a theory that's different from, as John Stuart Mill said, the mere likings and dislikings of a majority. It's not the fact that people disapprove. It's the fact that their well-being or agency is actually damaged. I want to come back to the harm issue, but I want to raise one other question related to the power of the state. You mentioned the state might be too weak, can't really shut down a market effectively. Or the state is bureaucratically inept. Correct. How about it's not just inept but it's manipulated. So to take the airport security example, the people who make these very complicated scanners, which I don't believe do anything to make me safer--it's an empirical question. But there is a certain unattractive aspect to it, which is that the people who make the scanners make large contributions to politicians, so we can get outcomes that aren't effective at all. Absolutely. You need an assessment about the institution, the capacities of the institutions. I tend to be less pessimistic about the capacities of the state than some of my libertarian friends are; but it's an empirical question as to whether or not having state regulation has better outcomes along the moral dimensions we care about than not having intervention. I think you have to look at it case by case.
28:38Back to the harm issue. You give four characteristics that can lead to a noxious market, meaning a market that we might on grounds of justice and ethics not allow to take place freely. What are some of those characteristics you mentioned? Going back to the idea that markets are heterogeneous, not all the same, I identify four parameters that I think noxious markets share, to some extent or another. To paraphrase a line from Tolstoy, not all noxious markets are the same. Happy markets are the same, but noxious markets are all different. Anna Karenina, first line. Some markets have what I call weak agency. You can think about that as either low levels of information or low levels of authorship of the market. So, you think about child labor markets--children are parties in some sense to the exchange, but they are not authors of the exchange. People are transacting for them. Dictators on the international market contracting debt. These are markets that have weak agency; I think that's a flag, and the weaker the agency, the more the market in my view gets to be a noxious market. I try to give a bunch of examples of weak agency. Child labor is one. Maybe if you think about the housing bubble and how much people really understood about getting into subprime loans--you might think there were real information failures there. A lot of people were spending other people's money, which is an example of how this arises and why that happens. That's one dimension. Another dimension is harm. Some markets are harmful either for the agents themselves--usually that goes along with their having weak agency; they don't really understand what they are contracting--or has harm for third parties. So, again, the child labor case, you harm families who want to educate their children but now can't because they can't afford not to put their children to work. Pollution is a standard case of third-party harm. Some markets generate sufficient individual harms that they push the market into a noxious category. I also have a category of social harm. Some markets are really problematic from the point of view of a democracy. And now we get into more complicated and debatable--like, what should we think about campaign finance? What are the alternatives and how does it work? Many complexities. You might worry about media being simply up for sale: what does it do to the possibility of democratic discussion and wide range of opinions. Empirical question. So, on my view, you have to look at, sometimes for the social fabric. So, child labor is not only bad for children; it's bad for the kind of society that you generate when you have widespread child labor, which is an illiterate population. This argument has been made in various ways on the minimum wage law. We'll come back to that. Fourth category is a form of inequality but it's really about extreme vulnerability. One other feature of markets is agents can come to market with very different amounts of resources. I argue that in some cases the differences in amount of resources agents bring leaves some people in effect with no ability to enter, exit, or sanction; and so the people then in that market accept terms that nobody with an alternative would ever accept. Price gouging. This is related to Mike Munger's work on what he calls euvoluntary exchanges--truly voluntary exchanges. So, he brings in the concept of the best alternative to no agreement--a BATNA--meaning if there's an enormous difference between what I have at stake in the transaction and what you have at stake. Example of someone in the desert; example of the Titanic in a way. Dramatic; small difference, not a big difference. Someone who is thirsty--you have water, you are healthy and fine; you charge the person every single penny they have with them and their heirs and everything else and they pay it; if it doesn't happen they are dead. Radically different set of circumstances each person is facing. The implications of that are interesting, but that's a dramatic example of vulnerability. So, let's take some examples. Let's start with price gouging. Where does that fit in your taxonomy--so-called price gouging? I think there are going to be some circumstances--again, we have to think of what are the alternative institutions--where, take fire sales after droughts in third world countries, where we just feel somebody is being taken unfair advantage of, and that the market isn't in this sense really improving the prospects. Price gouging is a little bit like a de facto monopoly. And if you think that monopoly is supposed to be the counter--markets are freedom and monopoly is the state of unfreedom because there is really only one transactor--there are a lot of cases of markets that start to look more like monopoly. Not all monopolies; a lot of monopolies you can walk away from. This is where the extreme vulnerability comes in, like the person who is faced with a desert where one person owns all the water. This is actually an example that Robert Nozick worries about in Anarchy, State, and Utopia where he wants to say, even on his extreme libertarian theory, there's got to be a limit to what the person who owns all the water can do. He thinks that he finds that limit in a return to the Lockean proviso; question whether he can really help himself with the Lockean proviso. Talk about what that is. The Lockean proviso is the idea in John Locke that you can obtain as much property, product of your initiative and entrepreneurial skill as is compatible with leaving enough and as good for others. So, you can appropriate land, water, only up to the point when enough and as good is left for others. And for Locke, the origin of that is in a religious view, where he thinks God has given the earth in common to man to use; and that's a limit on how much any individual can appropriate. So there's a norm, this norm of the pre-appropriation rights to the world for all living things and that sets a limit to what you can do to other people. You can't gouge. You can't be a monopolist in such a way as you make the position of people worse off than it would have been had there been no other.
37:39I really think of these as the flip side, price gouging and the minimum wage--they are both phenomena where the price that's produced by freedom, by free exchange, has some unappealing characteristics. As you argue, I think correctly, you have to look at the alternatives. I think the standard way that--I think it's the most attractive case you can make--we've put a simple, we haven't gone on a case-by-case base; in general, we've put ceilings or floors in. Nice examples because in the case of the so-called price gouging, it's a short term problem, temporary, induced typically by a catastrophe, a flood or a hurricane, tornado. Minimum wage is a long term problem; it's a price that persists. Let's take your monopoly example. Certainly if I have low skill, I can have lots of competitive alternatives for my talents; but they are all crummy. So, in that sense it mimics a monopoly outcome. And certainly with, say, clean water after a disaster, fresh water, ice, after a power outage due to a disaster, there might be a lot of people selling ice, but it's so few relative to the demand that the price is something akin to a monopoly price. Both dramatic examples that are hard for classical liberals to defend. The other version of this, and you bring this up in the book, is somebody who can't afford health care, which again, if you can't afford apples, you can say life's tough, but it's not a tragedy; but if you can't afford health care, it's a tragedy. In all these cases, what I think is missing from the critique of markets--I think there are two things that are missing. One is the dynamic aspect of it. For example, if I put a price ceiling on ice after a hurricane--not done at the national level very much any more but it's done a lot at the state level; they ban unfair prices--I discourage the provision of ice. Obviously we are going to hurt the people who are now not going to get ice--now they will get none. They will not have the freedom to transact. You can make the case of kidney sales. It's an empirical question, as you point out; but let's say it is the case that banning kidney sales means more people are going to die. And in the case of the minimum wage the economists' argument--I think the correct argument; there are a lot of other arguments that I abhor--is you are going to hurt the people you are trying to help. What's your reaction to those incentive effects that get put into motion in those situations? I understand you recognize them, but you don't often find them decisive in your calculus. Why not? I'm not an empirical social scientist. I agree with you. I think the dynamic effects are really key. Child labor is an interesting case because I think there may be situations in which there isn't any other alternative. You ban child labor, you don't get some effect of more investment into adult labor. The adult labor is not enough to sustain the family, it's not productive enough; and you have worse outcomes. I think in those cases we have to be open to think about transitional measures that might ultimately lead us down the path we want; but we can't get there by simply banning a market. So, I think the dynamic effects are really important. I'm just less--I don't find the idea that this is the best we can do--I'm not convinced. Because I'm not convinced we ever really tried all the alternatives. Even to take the example of organs. Organs is a hard case and I don't have a clear view myself on whether or not organ markets are permissible and if so under what circumstances. But I don't think on the alternative we've done enough to try to increase donations, and there are a lot of different things we could do. One of the obvious is change the default. Right now you have to fill a pink dot on your license to say you are going to be an organ donor. Do the opposite--make the default everybody is an organ donor and you have to put a pink dot if you don't want to be an organ donor. Opt out rather than opt in. That won't solve the problem, but it will probably make some modest increase. We could have campaigns. Stanford always has a battle that goes on with Berkeley over who can give the most blood. And it's amazing what that does. I think there's a lot more we could do, with technologies to induce, give incentives to donate. Non-monetary incentives. But if it turned out that there's nothing we can do--sometimes it turns out there are really tragic circumstances, all bets are off as to what the best solution is in the context where you can't ever really solve the problem. I certainly agree with you--let me say it a different way than I was going to say it. It's certainly true if you go to a market solution of the innovation that might have come forth otherwise. Of course the reverse is true. What I always find fascinating is we try hard sometimes; it still fails but people don't accept that empirical case. Could be it's still not a good empirical case. The example I use is education. I'd like to get the state out of the education market. You make defenses of public education of various kinds throughout the book. The standard defense of public education is we haven't tried hard enough. I think we've tried for forty years; we've spent an enormous amount of money, greater than we did forty years ago; it's failed. We're condemning kids in the inner cities and elsewhere to bitter and horrible lives, grossly unfair and unjust. Isn't the burden of proof on the proponents now to prove why it's working? I think actually education has worked relatively well except, as you say, for the least advantaged. If you look at standard education for middle class kids, it actually does a pretty good job. Surprisingly good, even. And that's a lot of kids. It's one of the big public goods the state provides and by and large it does it relatively well. There are circumstances in which it doesn't function well, and then the question is: Why? Lots of empirical things here. My own view is that a lot of the fix for the education problem has to be outside education and doesn't have anything to do with schools. No doubt. Although another big part of the problem I think is--my bias--the places that do well, the parents have alternatives; the places that don't do well, the parents don't. So, there's an incentive effect working within the public system. Maybe. Easy to say. Hard to confirm. But education is a case where we do think--it's a little bit like the minimum wage--there's some minimum level, whether it's the state that should provide it or some other entity. There's something that everyone is entitled to that we ought to protect. If you don't think the market by itself should supply this, because if there were market failure, we wouldn't be happy with some kids not going to school because their parents couldn't afford to educate them. So, for me that's an empirical question. I'm much happier with that outcome than a world where people do go to school and don't learn anything for 12 years. Can we do better about that, improve that? Obviously we could, but we don't seem to make enough progress.
47:15The other issue I want to raise is--fascinates me because it's so hard to think about it in any analytical way--you give a number of examples in the book where there are aspects to a market solution that are unattractive because--hard to put into words. There's something about the texture of life that results from having a commercial transaction. There are things we don't like about it. We've given a lot of examples on this program. You don't go to a friend's house and say: I couldn't stop for a bottle of wine, so here's $20. Buy one you'll really like. It's even better than giving them the bottle you would have chosen. No one thinks that's a good idea except the worst economists. There are things about commercial transactions--the change can't be measured as tangibly as prices. I think that's one of the main advantages of your book in bringing that out. Similarly those things on the government provision side. So, for example, if I have--you give the example of someone who doesn't have health care--doesn't have health insurance, doesn't have health care. So destitute. Yes, there's an argument for the state intervening. But if the state intervenes, state intervention produces a certain quality of experience for that person that's very different from the quality they'd have in a charitable solution. Now, you can debate about whether the magnitudes would be as big. But when I think about, as a taxpayer, what I'm doing for poor people through health programs and I think about how the actual bureaucracy works, and it's not as glorious and ennobling as we might think about it in theory, and I compare that to a world where individuals are motivated to help their fellow human beings, we lose something when we go to that bureaucratic, coercive world. And I find that people who don't like markets often don't recognize that. Do you agree that that's an issue? I'm less fond of the charitable solution mostly because I think there's a demeaning relationship between the recipient and the donor in a charity case. Because the recipient is dependent. In the same way you might worry about government creating dependency, there's another kind of dependency here of somebody's largesse. And that creates a texture of a relationship between people that is--you want people to look each other in the eye. You don't want them to grovel, to have to doff their hat. So, I worry about that kind of relationship. In some sense, the impersonality of government takes that away. And especially if you think it's an entitlement, you are not dependent on somebody's largesse, we as a society have decided that all of our members are going to get certain benefits. Whatever their position or condition is in society. Now, I think we have to worry about--and this is where the texture comes in--long term incentive effects and we don't want to create a bunch of people who are free riders. We want to have an ethos where people see it's a co-responsibility for all of us. And you have to worry about that. But I'm not as big a fan of the charity solution as getting the virtues that you want. You get some, I agree. The opportunities for altruism. For the donor. It depends. Maimonides, great 13th century Jewish philosopher, said: The highest level of charity is when both sides are anonymous. I don't know who I'm giving to; I don't know who I'm receiving from. And this was Titmuss's thing about blood--that blood was the ultimate relationship, form of charity, because the recipients were anonymous and the donors were anonymous. In the current world, we allow--I don't know if this is true or not: if I want to donate a kidney--of course, kidney is a great example, as is blood, because you can donate it and keep living, although in the case of the kidney, you've raised your chance a little bit of dying because inherently a little bit dangerous to only have one kidney left. But I think in a kidney case, you can give to a stranger. But of course you are going to get to know that person; it leads to some very tough issues. And some people don't want to know the person; so you can request anonymity. On both sides. But some people don't want it, some do. They want to thank the person; or they want to browbeat the person. There is something about the anonymous giving. You can see why Maimonides thought that this was the ultimate giving, because there is no possibility of tit for tat or groveling. It's in its purest form. A friend of mine because a Chief Financial Officer (CFO) for a foundation. When he got the job another friend said: Congratulations; you'll never pay for dinner again and you'll never get an anonymous compliment. Because of course when you are handing out large sums of money people like you more. They are going to pretend they like you more. There's something degrading about that. I had an interesting experience this year because one of my students has decided to be an organ donor. I've been thinking about this for myself too. There are risks involved; but of course you can live with one kidney, and particularly in the developed world if you are lucky enough to have access to health care really does raise an issue about why isn't this done more and what are our responsibilities and isn't this a kind of form of beneficence that ought to be encouraged. And when the student came to talk to me, I was like: Are you sure you want to do this? There was a place where I found my own intuitive pull, what I thought was probably the ethically right thing to do. And that's a case where you always worry. My argument, like many arguments in these realms, does appeal to intuitions. And you always have to worry when you appealing to intuitions: What is the status of these intuitions? There are a lot of intuitions we'd probably be better off if we could push away. On the other hand, I don't think we can bypass them. Well, they come from a deep place, and we often invoke F. A. Hayek on this program, and he was a deep respecter of those norms and intuitions that had evolved over time, culturally, even though we might not understand them; they have a certain merit for that reason. Interesting--I have a friend that's a social worker and she counsels organ donors. I think their default is to discourage them initially on the grounds that there's often regret, complications, problems. The initial enthusiasm passes. Issues you talk about in the book--issues of perfect information, knowledge, agency, vulnerability. But I think our default should be to applaud it. Some people view it as a form of pathology--because it's too generous. It's such a generous gesture that something must be terribly wrong. I think we should probably applaud it. I think so too, but I find myself strangely resistant to doing what I think is right. Oh, it's the academic in you. It's the contrarian in all academics.
56:21Example you have in there that I haven't thought about in a long time but it's a classic example, which is we don't allow market in votes. My view on this, very similar to my problems with efficiency as a norm--there's a lot of ethical issues that I think we all would agree. I really don't care about the efficiency. I think there should be a principle that I'm free to read what I want and if it harms you, could be willing to pay me to stop reading it. But there's collective action problems, free riding problems; you can't raise the money, should just ban those books because the net gain is supposedly greater than the net loss. I think that's just evil; I think we should have a moral imperative. And similarly I have no problem arguing that it's wrong to sell votes. It's unethical. But the more I started thinking about it, I started thinking: Why? It is our natural thought: Well, of course it's wrong to sell votes. But what's wrong with selling votes? I think it's a great question to think about. It seems so obvious, and yet it's not so easy to give an explanation. One reason people might think right away is: the whole point of giving people votes, a democracy, is to move away from aristocracy, where the decisions are made by the rich and the powerful; and if you have an unequal society and if you allow a market in votes, poor people it's more likely will sell their votes, so in fact you are moving back to a system where wealth predicts political influence and power. And that's an anti-democratic idea. It's an aristocratic idea. That's part of it. I don't think it's the full explanation, because you could imagine a world in which we redistributed income and then ask: Now do we want to allow a market in votes? You give the James Tobin quote, a famous quote, at least when I was in grad school: A good second-year can prove it's efficient to let people sell votes on the obvious grounds that to let people sell votes makes everyone better off--what's the problem? One way to think about it is that votes aren't your own individual property. We the people hold them, just deliberating and decide what you want to do for us; and when you treat your vote like it's just a private good you are in some sense changing--this would be a kind of Walzerian view about the meaning of having a vote and what voting is as a practice. Michael Walzer--this idea that it's really about co-deliberation among equals. It's not about private preferences. It's about: we're trying to figure out what we should do as a country, in the case of national election. What's good for us, what's in our good? Once you take the vote out and make it a market good, then it's not really about what should we all do--then it's about what do I want? I don't care about those things, so you take it. The funny part about--the reason I like the argument--is that I'm a person who is not exactly sympathetic to democracy as a decision-making process, which is part of the reason I'm libertarian. But, even I am sort of result of selling votes. But then I start thinking about it, because I'm susceptible to this romance that the current system has this egalitarian aspect that we all get one vote. You gave the example that maybe if we sell votes, the rich will have a lot of political power--both the left and the right are worried about it right now, with bank bailouts and the way the country is going. It's ironic that we have this incredible intuition about the sanctity of the vote. Although I like democracy more than dictatorship. Right, what are the alternatives? But the current democracy I don't like so much; I would rather see things put into the sphere of decentralized decision-making rather than top-down. So, I thought it to be a very provocative example. I often start when I teach this stuff with the vote because the students immediately say: Of course not. And then find that they quickly run out of arguments as to why not.

COMMENTS (43 to date)
Richard W. Fulmer writes:

Supporters of government control often admit that free markets deliver the goods, but argue that governments distribute them more fairly. They point to people who, because of age or disability, are incapable of producing anything. The government must control the economy, they claim, so that it can redistribute goods to these few.

But rewarding need yields more of it, adding those who will not produce to those who cannot. And taxing demonstrated ability yields less ability demonstrated. Need, which socialism claims to address, can only grow under socialism. By contrast, under the free market, need does not pay, production does, so need declines and production grows.

The choice between government control and the free market is the choice between government coercively combating growing need amid growing poverty and individuals voluntarily combatting shrinking need amid growing wealth.

How much misery and poverty are we willing to impose because of our distaste for markets? And where is the limit? At what point is Professor Satz's drive for "fairness" satisfied?

Krzysztof Ostaszewski writes:

In child labor, the biggest cost not directly counted by the market is the human capital lost by the child, i.e., reduced or lost opportunity to attain education. In view of what Professor Satz proclaims is her objective, not including this very important cost is quite shocking.

But education may be taken over by government, and then its value declines. The more political education process becomes, the more desirable child labor becomes. The child may be learning something on the job, instead of not learning anything and being indoctrinated into some violent ideology at government school. The most effective way to prevent undesirable child labor is to make the education system educate, not indoctrinate. Current public education system in the United States at the high school level is hardly an education system, and claiming otherwise sounds only like self-serving political posturing. Public high schools in the U.S. do not teach physics, do not teach calculus, and do not teach ideas of freedom. This is worse than failure. Defenders of the current system do not care about education, they only care about their own politics, or their incomes from the system.

The other obvious and very important cost not addressed in the podcast is the cost of coercion, both individual and social. If you invite government into any activity, you are inviting coercion. As Bertold Brecht said: "Unless coerced, people generally do not consent to use of coercion against themselves." Force in response to coercion is, at least within certain boundaries, justified. But coercion, even justified, once invited, expands. This is not a trivial item, and again, not something to be ignored so blatantly. Russ Roberts tried to bring this up, and Professor Satz brushed it off, which was rather shocking to me. How can a human being not pause about coercive measures against other human beings, especially someone who proclaims to be a scholar of humanity?

William writes:

Did she say that public education does a fairly good job for middle class kids? Its obvious she hasn't been in the public school system for many years. The most important things I have learned in my life were in the five years following college. High school was a joke and, with the exception of degree-specific courses (e.g. "core" classes), so was college.

This is probably my least favorite episode of EconTalk since I started listening four months ago.

Drobviousso writes:

I was very disappointing in this guest. Usually, guests that don't 'tow your party line' are the most thoughtful and put forward good arguments. Most of her assertions could be replaced with "Yucky, I don't like it when you do that." I've been listening for longer than 4 months, and I'd have to say that this was my least favorite guest I can recall.

Russ Roberts writes:

William (and Drobviousso),

Sorry you were disappointed. I enjoyed the conversation very much because I learned something.

That's my goal with every episode. To learn something. I figure that if I learn something, the listeners will too. But that isn't always the case, of course.

Drobviousso writes:

Russ - Different strokes. Maybe I'll give it a second listen and see if I come away with a different impression.

Robert Kennedy writes:

Not disappointing for me but maybe a little frustrating. I kept hoping for a dust up here or there but Russ & Debra were quite respectful of each other so the conversation ended up being quite civil.

With all of the Tea Party bashing in the news and opinion pages these days, I did find it refreshing for someone like Debra to disagree with but still acknowledge the perspectives of those that favor markets.

I also respected Debra's perspectives that government interventions are often less than ideal but still better than some alternatives. I still disagree with her but respect the point of view.

I agree with William's comment about middle class education. Our daughter is in a better than average public school in a very middle class area and she is not being taught much. we're tightening our belts and moving her to a private school this fall.

Mads Lindstrøm writes:

Regarding the vote selling. Maybe the question: "why do people vote?" can shed some light upon why we see vote selling as a terrible idea.

Some people would argue, that people vote for selfish reasons. That is, they vote for politicians who make the voter better off. The problem with this explanation, is that for your particular vote to decide the election, then the two candidates must be maximally one vote apart. And when did that ever happen in a national election? What are the odds?

Then why do we vote? It could be that it helps people feel part of something bigger than themselves; feel as one nation. It could be that people vote out of duty. It could be that people vote to satisfy emotional needs. Whatever your answer, I suspect that it is incompatible with selling votes, as the legalization of vote selling rests upon rational expectations, and voting do not.

Nathan writes:

In contrast, I thought this was excellent. When both sides of an ideological rift can agree that it comes down to empirical questions this is a good thing. She seemed much more thoughtful and cogent than the Keynesianists who have been on. Like all ethnicists a bit needlessly preoccupied by bizarre concocted scenarios (is there such a thing as an anthropological ethicist, or empirical ethnicist?), but mostly her rhetorical weaknesses and those of her discipline she was quite frank on, e.g. an inability to make the value and place of intuitions rigorous.

Jason writes:

I don't agree with Debra Satz, but I tried to consider her points throughout the podcast. However, she completely lost me when she objected to private charity (@49 minutes). I was so perplexed at her logic that I couldn't take anything else she said seriously.

The recipient is dependent on private charity? That's the advantage of government involvement? You have to really love top-down control to buy into that logic. No matter what proponents call it, government spending is never an entitlement in the sense they envision it. That "charity" is dependent on taxpayer largesse and voters through Congress can alter or cease those programs at any time. Or in more dramatic fashion, government may not run out of promises, but it can run of money (at least purchasing power).

Schepp writes:

I agree with Jason on the charity. When I heard that people feel put down when they recieve benefits from charity, I thought isn't that part of the point. My grandparents would not dare take charity. They had too much pride, or may be better said they had the right amount of pride to find a way.

Dr. Roberts, I was not extemely impressed with your guests views, but you always get so many great comments from your listeners when your guests don't follow the libertarian line. I did enjoy the discussion of selling votes.

I thought that your guest was much more a philosopher than an economist with a much different academic format from most of your guests. Thank you both for the podcast.

Charlie writes:

Satz badly mangled the definition of Pareto Efficiency. Under Pareto Efficiency, an outcome is more efficient if at least one person is made better off, while no other is made worse off. IT DOES NOT FOLLOW that an outcome is less efficient if it is not more efficient.

With the example she used, it is not true that the shift of wealth from one person to others can be called inefficient. It is true it is not more efficient, but Pareto Efficiency makes no other statement. It cannot be said to be less efficient either.

This is what makes Pareto Efficiency so useful to economists. The statement is so weak that when it can be achieved it is very strong. It is hard to think of a value system under which making someone better off, while not hurting anyone else is not better. When someone is made better off at the expense of someone else, Pareto Efficiency makes no statement and a different conceptual framework is required to make a statement about which outcome is better.

Russ also made the mistake of calling Pareto Efficiency primarily utilitarian. That's also incorrect. As Satz example makes obvious, the transfer of welfare from a very rich individual to many very poor individuals is clearly justified under a utilitarian value system, but cannot be said to be more efficient under Pareto efficency.

This really bothers me, because I would like to see economists grapple with more than just efficiency, but in order to change we will need very good work from philosophers that understand economics. This mistake was very fundamental and thus quite unsettling.

Russ Roberts writes:

Charlie,

I think you are half-right or 2/3 or 1/4. You can tell me. She didn't mangle the concept badly. Redistribution from a billionaire to a poor person cannot be justified on efficiency grounds. I thought that was her point and she is right. You're right in that it is not inefficient to make the transfer. But she is right in that it is not Pareto improving, a variant of Pareto efficiency.

As for my claim that efficiency is based on utilitarianism, price controls, tariffs and so on are inefficient in the sense that the term is usually used--the losses exceed the gains. Removing tariffs or price controls produce gains that exceed the losses. That is, the gains are large enough to make some people better off without making anyone worse off. While I am opposed to both price controls and tariffs, I do not think the efficiency argument is compelling especially when the compensation is never paid. So where does that leave us?

Michael writes:

Dr. Roberts, I have been a long time reader at Cafe Hayak and have only begun listening to the podcasts recently.

In perusing the archives, I have found myself trying to listen to podcasts where the guest holds a position mostly opposite of my own. I do this not because I am a masochist, but because I learn how to counter arguments against classical liberalism.

So, please keep bringing opposing viewpoints on. I am looking for opportunities to learn from more than one perspective, in the hope that this will increase the strength of the foundation upon which I am building my knowledge.

Can you direct me to a good source for learning more about the economics meaning of efficiency?

That being said, I too was shocked on Dr. Satz view of charity. I expected her position on the other so-called noxious markets presented, but really didn't see charity in the same light.

I did not find compelling her argument that government anonymity was one of least harmful paths to helping people in need. She seemed to gloss over the issue of dependence. Also, the power of shame as a motivator of changing behavior was missing from the conversation.

Ben writes:

I really enjoyed this interview Russ - it's always good to hear a coherent argument from a different viewpoint.

I would have bought her book, but unfortunately it's not available for Kindle. Why authors continue to release hard-cover only baffles me (and robs me of a good read in the process).

Ben

Patrick Gann writes:

Russ,

I've been a listener since the Keynes/Hayek rap videos reached me. I think this is my first time commenting.

This particular episode reminds me of just how important this work is. I see a lot of commenters upset at Satz's treatment of various specific topics: but for econ novices like myself, hearing a discussion between Roberts (generally more free-market / Hayek-ian) and Satz (leaning more towards Keynes) is extremely helpful and informative. I'm a big-time Ron Paul fan (mostly for his non-interventionist policy), but at the same time, I was raised to be skeptical of free market capitalism, seeing it as a pure evil.

Between resources like this podcast and primers like Henry Hazlitt's "Economics In One Lesson," I've been able to de- and re-educate myself without demonizing my own past ideas.

All of this to say, you're doing a wonderful thing here Russ. Real discussions with real people, as opposed to setting up straw men to topple down, is what we need to move forward as a society.

emerich writes:

This Econtalk was revealing because Satz apparently represents the views a thoughtful, economically literate liberal. And what is the basis of her policy preferences? She opposes “price gouging” (however defined) because it’s not nice. So make it illegal. She opposes organ sales because they’re repugnant. So make them illegal. She’s in favor of state-organized entitlements rather than private charity because the latter is demeaning to recipients, i.e., not nice and she doesn’t like it. So she favors a coercive, state-run entitlement apparatus. Am I alone in finding the rigor of her thinking weak? She essentially advocates state solutions to implement coercive policies favored by herself and people who agree with her. I find her mindset far more repugnant and dangerous than the externalities of price gouging, organ sales, or private charity.

Charlie writes:

"But she is right in that it is not Pareto improving, a variant of Pareto efficiency."

I guess we are just arguing over how bad her mistake was. The word inefficient under Pareto efficiency means that some other outcome is Pareto improving. I thought it was a big conceptual mistake to use it as she did. Another way it matters is under the correct conceptual framework, it doesn't matter which outcome you start with. A transfer from a billionaire to many desparate isn't Pareto improving, but neither is the opposite--creating a billionaire from a transfer from the lower class. Perhaps, she explained it better in her book. I hope so.

"As for my claim that efficiency is based on utilitarianism..."

Now I see what you are saying. I agree that economists often use the word efficiency in this way. It gets away from the clearly defined Pareto efficiency concept and into a sort of pop-efficiency concept that isn't clearly defined.

I think it was incorrect when you equated utilitarian policies to policies that make the pie bigger. There are many utilitarian policies that make the size of the pie smaller. I point this out, because economists use the word in this context often to mean one or the other (or even a number of different things). Obviously, that is not ideal.

"So where does that leave us?"

Sometimes I think it's enough just to describe outcomes. Here's a bunch of different conceptual frameworks (models) for thinking about barriers to trade. Here are the different outcomes under the models with and without barriers. Here is some empirical evidence to help us decide when the models assumptions are reasonable, when the predictions are accurate, and what the magnitudes are. Let the students make the fairness/moral judgements.

That said, I still think the concept of Pareto efficiency is very useful, even if it is just a narrow modeling concept. Many philosophical concepts are narrow and don't transfer well from clean thought experiments to very mess real world situations.

ThomasL writes:
I think there's a demeaning relationship between the recipient and the donor in a charity case... In some sense, the impersonality of government takes that away.

From an ethical and philosophical standpoint, I think this point deserves closer examination.

Can one really change the essence of something by introducing a layer of indirection?

The essence of charitable giving is that the person able to meet the need gives freely, and the person with the need receives freely. There are myriad other types of transfers that can be effected, but they aren’t called charitable.

If we introduce a third party to make the gift anonymous, as Maimonides mentions in his second highest level of charity, has the essence of the matter changed? I don't think that is has, and I believe I am on Maimonides side in that. Being anonymous is a defensive measure against the temptation of the giver to feel superior or of the recipient to feel inferior, or both, which is the condition Satz fears (and fears above all else, I think). However, the temptation is not essential to charity; it is a corruption of charity. It is an imperfect example; but imagine charity as a piece of food. Anonymizing the transaction is like sealing the food in a wrapper so that mold and bacteria won’t taint it. Pride and inferiority are no more essentially parts of charity than mold is essentially part of food -- but in both cases it is wise to take steps to keep them out. It is important not to forget that the wrapper isn’t essentially part of the food either.

Having received their need directly from someone they knew, it would be proper for a person to be grateful. “I am grateful that you did that for me.” If someone received it anonymously, but still recognized the essence of what had happened, they would say, “I have no idea who did that, but I am grateful that they did that for me.” Not, as Satz would have them say, “I was entitled to that as a member of this society.” The latter is confusion. The person simply failed to recognize what had happened. A Pragmatist could argue it was a useful confusion, and therefore is true. But to every non-Pragmatist (which is basically everyone), the person simply missed the boat; because nothing essential had changed. Food doesn't become different food when it is placed in a wrapper.

Satz, however, seems to think she has made some essential change. And she has, but not the one she claims. She quickly lays claim to Maimonides for justification of this principle, but with an unjustifiable twist. She does not claim that the “impersonality… takes… away” the corruption that she dislikes. She claims that the “impersonality of government takes… away...” the problems. Where did government come from? Not from Maimonides, surely. It seems to be her own insertion. She attempts to borrow Maimonides moral authority on charity, but she does so on her on state-centric terms. What she is advocating is not to be found in his levels of charity at all, because to the extent that she introduces compulsion (government taxes) she removes charity. She did not succeed in changing the essence of charity (which Maimonides never attempted); nor in improving the practical exercise of charity in some way (which Maimonides did attempt). To the extent she has succeeded at anything she has succeeded in making the transfer not charity. There is nothing necessarily off in that. One could claim that non-charitable means were the best means. There is plenty of ground to stand on and argue that position-- a Utilitarian, for example, might even argue that meeting the need is all that matters, and the means are inconsequential; and there are other arguments that could be made.

However, it is either a sloppy argument or a dishonest one to take the tools and moral arguments of a philosophy primarily concerned with the rightness of individual acts executed individual actors, as is Maimonides with his Levels of Charity, and shoehorn in the State as its ultimate fulfillment. Compulsion is not the ideal realization of charity. It isn't charity at all.

MRincon writes:

Can someone please better explain to me the concept of efficiency? I understand efficiency as the ratio of outcome over input. So I fail to see why you wouldn't use efficiency as the objective function in a maximization problem. Of course, one might argue that we are optimizing the wrong function or that we are using the wrong constrains, but that doesn't mean that efficiency should not be the only decisive factor once the problem is set. What am I missing?

Keith Vertrees writes:

Like the others, I was particularly offended by Satz' comments on charity.

I think the young ladies interviewed here, on the subject of recent riots in London, might gain some perspective from 'doffing their hats' to some of the taxpayers from whom they demand largesse.

Schepp writes:

MRincon,

I will not claim to be right, but I will take a shot at engaging in a discussion.

I think you hit it right on in your comment. From my reading of many studies and reports once the author or proponents demonstrate with the base facts, that they have assumed, that their proposal creates more benefits than costs, efficiency is quickly claimed. But the reality is the assumptions affect the analyis, known and unknown externalities are not always considered, and different possible explanation or not always explored.

Efficiency in many uses by economists can be used to claim that the answer has taken everything into account. I respectfully ask, if efficiency is only one measure what are the other measures that you suggest be considered? In my mind efficiency analysis tries to account for everything. I would think that your additional measure(s) need to be incorporated into the efficiency to ensure that there is not double counting.

From my interpretation, I don't see Russ saying that he would be against a universal everything was considered efficiency, but more likely thinks that actual efficiency claims he has seen are so far from a standard that enables a good and reasonable decision that he is very distrustful of the claim.

One of my favorite examples is Smart Growth. There may be many smart things about Smart Growth but the outright claim in the naming of the growth leads me to distrust merits of the methods.

Charlie writes:

MRincon,

Pareto efficiency actually has nothing to do with output. It is soley defined at the individual level. Outcome A is more (Pareto) efficient than outcome B, if at least one person is made better off, while no one else is made worse off.

Here are some examples. Think of the numbers as a measure of well-being (utils, happy points...whatever, but not necessarily consumption). These examples have a society of two individuals.

A 50 50
B 55 60

Both individuals are better off, outcome B is more efficient that outcome A.

A 50 50
B 50 500

The first individual is not worse off and the second individual is much better off, outcome B is Pareto efficient. We have to remember that these are measures of well-being. Perhaps, the second individual is much better off, because he is much, much wealthier than individual 1, but any jealousy or political/economic effects are already included in the measure of the first individual. Or you could imagine the opposite, individual 1 has worse consumption, but he's buddies with individual 2 and happy about his success. It doesn't matter, since the numbers represent well-being and individual 1 is indifferent.

A 50 50
B 49 500

Now individual 1 is worse off, so the move was not (pareto) efficient. It doesn't matter that individual 2 is a lot better off. It also doesn't mean either outcome is "better" than the other. Pareto efficiency makes not statement about, which is better, simply neither is more efficient than the other.


In economics jargon, output over input is usually called productivity. Obviously, there may be some confounding of the langauge, because people are sloppy and because efficiency has other meanings outside of economics.

Another reason that the language may be confusing is that economists often make assumptions in any given model that equate output with Pareto efficiency. For instance, many macro models start with a representative agent. It means the model starts with many individuals that are exactly the same. In this model, output will be equated with well-being, so an outcome with more output will be more efficient, since everyone is exactly the same. The output, by assumption, is spread evenly across individuals. More confusing, these models can be somewhat rich. We can talk about producer gains and consumer losses, for instance, even though, in the end, the representative agent is both the consumer and the producer.

Hope that helps.

MRincon writes:

Charlie and Schepp,

I think I now understand the distinction. Pareto efficiency adds one constrain to the optimization problem: maximize the overall ‘well being’ subject to the constrain that the change in ‘well being’ of any individual cannot be negative.

Now, Professor Zats says:

“… [T]he first thing is that efficiency is always relative to some background starting position. So, if the background starting position is very unequal, an outcome can be efficient but highly morally questionable.”

In the context of Pareto efficiency, I understand that to mean that we should add an additional constrain, something like ‘inequality, however defined, has to be less or equal than X’. Now, if that is correct, efficiency continues to be the only decisive factor between any pair of alternatives; it’s just a different kind of efficiency. Then, not much has changed. Moreover, I fail to see how the additional constrain adds anything useful; I doubt we could agree on a value for X or how much overall ‘well being’ are we willing to sacrifice to reduce inequality. Perhaps I’m still confused.

paul corrado writes:

loved the episode. thanks for all of your work Russ!

Andujar Cedeno writes:

To Whom It May Concern,

Can anyone post a transcript of the conversation?

[Andujar: The Highlights above on this page are akin to a transcript. They work best though if you listen while you read, because when I type them up, I don't have time to record who is saying what.--Econlib Ed.]

Dmitry writes:

I enjoyed this podcast very much. It was the only philosophical one in quite a long time.

Debra emphasized two points, about which I have been thinking quite a lot recently: underestimation of importance of externalities in standart economic courses and neglect of adverse effects of specialization of labor. I think that these two questions are severely "undertheorized" and I am very excited that Debra talked about them.

meyerj writes:

I do not know her solution to the healthcare problem but I find it interesting her responses to the healthcare debate and Russ's question to her about failing schools. Healthcare seemed to indicate a failure in markets. Despite the fact that most people have healthcare and the elderly (and not so elderly) and truly poor have it provided by the government. The problem is probably with the lower middle class and working poor.
On the other hand when Russ mentioned that public school's are failing and he wants the state out of education her response was that it works for the middle class and that the state is obviously doing a good job for many kids.
Her solutions in both may be to tweak at the margins. However, I find her reactions to the two very interesting and telling about the initial mindset of those who are more willing to do away with some markets!
I find the education failure is worse because the state is the one causing the harm and yet that is the one she is seemingly more willing to leave in place. While healthcare really isnt a properly functioning market with so much of the costs being paid by the government and so many mandated actions (treat all comers to the emergency room) and the shifting of costs onto others (medicare, medicaid to ordinary citizens with regular insurance.) Lastly, even those with regular health insurance are required to pay for insurance mandates they may not want and the fee for service is ultimately paid by a 3d party.
Yet, here reaction to healthcare is markets are problematic and with education - the state is overall doing a good job with many or most kids!

Seth writes:

I found Satz's reasoning for preferring government redistribution over private charity lacking.

First, she doesn't want charity recipients to have to grovel. Groveling and embarrassment is social norm that encourages folks to take action to not have to rely on charity. I think this is a great example of the fatal conceit. She assumes her preference superior to the evolved social norm without giving much consideration to the benefits of that norm.

Second, she likes the anonymous nature of government redistribution (because it takes away groveling), but doesn't consider that charity does not have to be government-run to achieve that. She actually gives one great example of a private charity that does this without gov't involvement - blood banks. My local blood bank is a private, not-for-profit. No government needed there. There are other examples as well -- United Way being one.

So, either she hasn't considered that private charity can meet her preference for anonymity (and she can choose for herself to give to those) between donor and recipient or she has other reasons to prefer government redistribution.

I believe she projects these other reasons when she said: "We want to have an ethos where people see it's a co-responsibility for all of us." i.e. She wants to use gov't to force her preferences on everyone else.

Mikekikon writes:

@Charlie

"This really bothers me, because I would like to see economists grapple with more than just efficiency, but in order to change we will need very good work from philosophers that understand economics. This mistake was very fundamental and thus quite unsettling."


Have you checked out Henry Hazlitt's "The Foundations of Morality"? It might change your view of utilitarianism.

Mikekikon writes:

People who give to charity voluntarily do so without reducing their own incentives to produce, because they WANT to give.

I think this should always be kept in mind.

gappy writes:

I listened to the podcast twice. I wanted to buy Satz's book for a long time, and this podcast has provided a chance to sample her style of thought. Of course, I liked some of her arguments more than others, although I didn't find her entirely consistent. She appeals often to her moral intuition as a sort of "smell test", yet in the second half of the podcast she warns against intuition yet she says we can't ignore it. It's such a hedged position as too sound as unfalsifiable as a horoscope. Also I found it revealing that she consider agency a big issue in markets, when the alternative (planning) has much bigger agency problems.

Still, I got two good insights from the podcast. The first one is on the nature and normative status of externalities in the wide sense. By "wide sense" I mean actions that affect the utility of agents through other mechanisms than prices (which is the narrow-sense economics definition). Selling my left eye for money would be repugnant to many. Scalping or hiring a laborer at a minimal wage could be as well. Should it be allowed or not? The legitimacy of control is at the core of the conflict between Progressive and Classical Liberals, and it precedes the choice of a welfare function. It would be fantastic if Econtalk could invite guests to clarify this issue bordering on Philosophy and Economics. I think that Jonathan Wolff would be a good guest to discuss it, as well as John Roemer.

The other insight is that certain market transactions can actually change the internal state of the good being traded. Someone hired for sex for the first time may offer his services voluntarily, but it won't probably be same person afterwards. This is not the same as marxian alienation, although it overlaps somewhat. I am not sure what are the normative implications of this observation, but it seems an interesting one.

xian writes:

that was great econtalk!

another example of productive exchange b/t not exactly aligned views.

luvd the "efficiency" criticism....it's not made enough.

well done!

Charlie writes:

Mikikikon

"Have you checked out Henry Hazlitt's "The Foundations of Morality"? It might change your view of utilitarianism."

Again, pareto efficiency and utilitarianism are very different concepts. Pareto efficiency basically makes no ethical assumptions.

I don't know if it would change my view or not, but to be clear I haven't expressed any views on utilitarianism. When I say grapple with more than just efficiency, I mean a great deal of ethical frameworks and doing so explicitly rather than implicitly (ie. here is the same model evaluated under different ethical frameworks).

bee writes:

Russ and Satz in this podcast provide a popular Victorian era view of economics (among the well to do). Just kidding, I'm not sure what it really is beyond the exercise of sentiments.

The discussion on efficiency and externalities was appalling. No real definitions were offered by the Roberts or Satz, but the concepts were trashed. In its place Roberts and Satz offered personal intuition. They delved into their feelings and those of the collective we. Very satisfying for those who find thinking painful.

The potentially interesting idea of alternative institutional arrangements was introduced but quickly subordinated to Roberts and Satz's intuitive feeling.

A killer comment was then made by Satz when she acknowledged that she was not an empirical social scientist. I then knew that Roberts and Satz were enjoying a religious experience where they could indulge there feelings and opine on their social sensitivities.

In summary, this is the worst podcast Russ has assembled to date.

Ben writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Russ Roberts writes:

bee,

Sorry you didn't like the podcast.

The definitions of efficiency and externalities that we were using were the standard ones. Those two concepts are interesting and useful but I do not find them decisive in and of themselves for policy decisions. I actually view them as dangerous for they cloak ideological positions in an aura of pseudo-science. I'd be interested in your defense of an alternative viewpoint if you could get past your disdain. Then I could learn something which would be lovely.

Your remarks about feelings, opining and religion are, I assume, an attack on the use of the morality and ideology in policy. I think it is better to have such views out in the open rather than pretending we are only doing "empirical social science." Again, an alternative defense that is more than insults would be much appreciated.

I have no interest or belief in the collective "we."

Cowboy Prof writes:

Russ,

Your statement that you are uncomfortable with utilitarianism perked up my ears because I just received Gilles Saint-Paul's book The Tyranny of Utility: Behavioral Social Sciences and the Rise of Paternalism from Princeton U Press.

I don't know the author personally, so I don't know how he would do in an interview format, but I think the thesis of his book would make for a great topic. Basically he is arguing that if you posit the assumptions of rationality, and then add all the recent social scientific research that says people are not perfectly rational, this gives social scientists an opening to promote social engineering (i.e., paternalism).

Cowboy Prof writes:

And now for a more substantive comment.

Wow! Where to begin? Several of the folks above have hit upon some of my problems with the podcast, including the issue of charity, so I won't rehash those.

I really caught a whiff of a pollyanish view of the state as an alternative means of distributing social resources. You started to probe about the alternatives to markets and she agreed that the state was a poor alternative since it was too weak! I'm sure the North Koreans are happy to know that they have a strong state and won't face any noxious problems with markets. And then when pressed on the state some more, she did eventually concede that the state might be inept, though she never saw it as an "incentive" problem. I really got the feeling that she thinks social problems could be solved by just having some really smart and competent people in charge without all those weakening constraints on their power. (See Thomas Friedman's desire to be like China.)

Cowboy Prof writes:

And finally, for the TITANIC problem. It seems that Satz thinks there were only two choices in this Schelling example: 1) the rich buy lifeboat space and the poor don't; or 2) everybody gets lifeboats. In this choice scenario, I think Satz thinks the same number of people will always be on the boat and it is just a matter of providing them lifeboats.

But if the boat company is not putting in lifeboats for everybody, it must be for some reason and it must involve a cost somewhere. So, if the boat company put in lifeboats for everybody, it will likely raise the cost and/or cut down the number of spots on the boat (which will also raise the cost). And if the cost goes up, this will make the boat unaffordable for some people, likely those with less income (or a lower reservation price).

So, the real choice becomes: 1) the rich buy lifeboats and the poor don't; or 2) all rich people get lifeboats and the poor don't get to go on the boat. I guess the poor who don't go on the boat will stay safe in the event of the boat capsizing, but is that really for Prof. Satz to make that choice (as I think she wants to do in a rather paternalistic way)?

As for the situation where you are sitting in the lifeboat looking at somebody drowning, yeah that would be a horrible situation, but we face that everyday. Some people get liver transplants and others don't. The only difference is that the guy with the liver transplant probably doesn't directly see the guy who doesn't get the liver and dies. Perhaps hospitals can put up pictures of all the people who need liver transplants and as you walk down the hall to get your transplant you have to look at them and then decide at the end of the hall if you still want it.

I don't believe Satz really thinks through the costs of her proposals very well. Nor do I think these scenarios are all that revealing once you spend 20 minutes thinking about them.

Jonas E writes:

Russ,

I think it was refreshing to have a show of philosofical nature. Please consider to do more podcasts along this line, with somebody you don't share political ground with.

I find, like some others above, Satz argument to why you shouldn't have a kidney market lacking. I might be a fruitfull idea to stay on this path discussing the (potential) limits of the market from a philosofical perspective. I've enjoyed and learned a lot from both the discussion with Munger and Satz.

Keep up the good work!

kebko writes:

I see an implied false assumption about the monetary nature of markets in some of these types of ethical critiques. There is no reason why markets, broadly defined, can't lead to transactions that deal with people's intuitions. For instance, there are many marriage markets. In some of those markets, there is a monetary portion of the transaction and a high level of family involvement. In other markets, no money is involved and it is an individual decision. Markets bear cultural expectations. In some cultures, a market for kidneys might develop that didn't involve money, for all we know. It's unlikely to develop in any form as long as ethicists keep insisting on political coersion as their favorite tool.
In fact, on topics like minimum wage, the opposite happens, where markets are incorporating all sorts of non-monetary benefits and trade-offs, and the government says, in effect, "No, this is just about the money."

John - Libertarian writes:

Russ - an interesting podcast to say the least. My point of view differs from hers on most issues - but one of the most glaring issues that really struck me was her point of view on the subject of charity. She seemed to be dismayed that private charity would result in “groveling”. I would doubt that very much, but even if, in some small number of cases, that were true and the person were to feel debased to a degree – is that necessarily a bad thing?

I look at it this way, the act of giving is one which people do willingly and without a feeling of superiority (at least in the United States). They do it for a number of reasons, but almost universally, behind each of those reasons, it’s done because it does make them feel good (again, not a bad thing). If a person is the recipient of the charity, one would hope that there would be a feeling of gratitude and usually there is. Gratitude is a much overlooked virtue in the liberal world (unless the “gratitude” is expressed in the form of a vote). Gratitude is basically the feeling of thanks for the person who helped you out. I would argue that without gratitude, the motivation to better one’s self out of the position of being in “need” is greatly diminished. Your guest seemed to believe that it’s a good thing to feel entitled. I see it a lot different than that. A feeling of entitlement does not motivate a person to better themselves. It does not build self esteem (at least not in any positive way).

Charity does two things, it brings joy to the giver (something that income taxes never do – unless you can show me of any significant number of people who speak of the joy they get in paying taxes – I don’t know of anyone from personal experience) and it brings gratitude from the recipient (and a little bit of embarrassment) – both are positive motivators to help most people get out of a position of need. Government charity brings neither joy to the giver (taxpayer) and no feeling of thanks from the recipient. Most are recipients feel bitterness toward the people who are responsible for the money being there (the tax payer) and feel entitled to the handout while demanding even more. There is very little incentive from that process to make them want to better themselves (if they do feel the need to better their situation, the motivation certainly doesn't come from the welfare that they are receiving) How is that beneficial to society as a whole? At any rate, that’s my two cents on that one small part of the discussion.

Also here is a current column from Thomas Sowell that is along similar lines - click here.

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