Transcript On Fairness and Needs in a Free Enterprise Economy

Meeting “Needs” in the Private
Sector: Nonprofit Institutions and
Non-Monetary Supply and Demand
John Garen
Department of Economics
University of Kentucky
University of Kentucky Economics Teaching Conference
April 2010
Motivation
• Seeming ascendency of belief in greater
government intervention in the economy; loss
of confidence in markets.
• Resurgence of the ideas that markets are
“unfair,” don’t meet “needs,” and that
government is needed to temper markets, to
provide a conscious for markets, etc.
• Discuss the private sector relative to the
public sector in this regard.
How One Might Use This in a Principles
Course
• Address the old question of fairness in markets.
• Discuss needs versus tradeoffs.
• Using basic economics to think about “altruistic”
behavior.
• Thinking about free enterprise as being more
than profit max. firms and self-serving
consumers.
• Using the non-nirvana approach to policy, i.e.,
comparing imperfect markets to imperfect govt.
. . .Uses – cont’d.
• Public good aspect of poverty programs;
tradeoff with inefficient govt.
• General ideas on the role of govt.
• A novel application of S & D analysis and
elasticity.
Needs vs. Tradeoffs
• “Needs” are hard to systematically and logically
define. For example, is water a need?
Many uses are not: washing the car, running the
sprinkler, bathing.
Can “needs” be forgone for something else, e.g.,
forgo buying a shirt (clothing) to be able to go to
more movies? This type of activity occurs.
• I don’t have a systematic definition. Use “need”
as in common usage as something important in
one’s life.
What’s Fair?
Much has been written on this. Here are a few
basics ideas.
• Socialist/Marxian phrase: “From each according
to his ability, to each according to his needs.”
Many, of various political stripes, are attracted to
this.
• Merit: Rewards based on the merit of
accomplishments. This has broad appeal.
• Mutual benefit: Activities where all participants
benefit are fair. (Pareto optimality is our phrase
for this.) This, too, seems to have broad appeal.
How Do Markets Fare on These
Metrics?
• Merit based. Thought to do well. Productivity is
rewarded. Some is due to luck, but much to effort.
• Mutual gains. The exchange that markets bring
promotes this goal. Not always well understood by the
public, however.
• Needs based. Markets are often thought to do poorly,
e.g., “the less fortunate are ignored,” “self interest
triumphs, ” and government is required to address this.
• I will focus the talk on this last point when comparing
the private and public sectors addressing of needs.
The Usual Approach: Profit Maximizing
Firms and Self Serving Consumers
• The above are the usual characterizations of
participants in free markets.
• Goods and services are sold by firms only to those who
will pay the market price. Only profits matter. It is
argued that this implies needs are ignored.
• Consumers ignore the needs of others, it is claimed, in
acquiring goods.
• But note that requiring the payment of the market
price essentially requires a respect for one another’s
desires and needs.
• Still, concerns about motivations of market participants
and the limited incomes of the poor causes unease.
Another Side to Humans
• Humans have broader concerns than profit,
money, and their own selves.
• Self interest is part human make up, but so are
other things, including concern for the needs of
others.
• Much evidence of this: charitable donations;
volunteering; care for children, families, friends.
• Organizations in a free enterprise economy
emerge in accord with these behaviors: charities,
churches, families, clubs, circles of friends.
Nonprofit Organizations
• Nothing dictates that an organization must be for-profit.
Nonprofits arise and survive in a free enterprise economy if
they adequately serve their stakeholders.
• Nonprofits often compete with for-profits and “win.”
Examples: religious services, the arts, hospital care, child
care.
• Their goal is often to allocate goods and services to those
who are most needy, e.g., food and counseling for the
homeless; emotional support for friends who are suffering;
and nurturing of children.
• Think of the family or the feed-the-homeless shelter as free
enterprise institutions that adopt socialist practices.
The Non-Nirvana Approach
• What special problems does this type of
organization face?
• How do private organizations deal with them
relative to government organizations?
Fundamental Problems with Allocating
by Need
• All organizations face these problems and must address
them reasonably well to accomplish it goals.
1. Assessing Needs
Consider a grocer who wishes to get food to the most
needy customers. S/he must know details of many
people’s lives. A difficult task, but failure to do so
means an incorrect allocation.
2. Income As a Proxy for Need (or Ability)
Is low income a sign of need or a desire for leisure?
Is high income a sign of ability, luck, or hard work?
Fundamental Problems – cont’d.
3. The Complexity of Need
Emotional support, spiritual guidance, advice,
commiseration, being held accountable are often
needs of those in unfortunate situations. These
have little to do with cash and are difficult to
assess.
4. Incentives and Dependence
Giving away goods and services induces more
use. This: (a) stretches the resources of the
organization; and (b) may cause an unwanted
dependence on the organization.
How Private Organizations Address
These Problems
• Close, personal knowledge of potential recipients
normally occurs. Assessment of true needs more
likely; less likely to be “gamed.”
Does the homeless man need food or counseling?
Does a friend who lost a spouse need cash or sympathy?
Does the child with poor grades need a tutor or discipline?
• An expectation of quid pro quos. Providers set
conditions and behaviors on recipients.
Shelter users are expected to be sober, go to religious services.
Kids are expected to behave and eat vegetables.
Friends are expected to return favors.
Using S & D: The “Market” for
Nonmonetary Exchange
• Recipients (demanders) receive a needed
good or service. In return, they undertake
some activity that providers (suppliers) wish
them to do. This is the “compensation” for
helping the recipient.
Nonmonetary Supply and Demand
NonMonet.
Price
(NP)
S
NP1
D
Q1
Quantity
Provided (Q)
• The assessment of needs works to assist the
truly needy. If not done well, it does not serve
fairness.
• The quid pro quo works to limit overuse and
dependence.
How Do Government Programs
Address these Problems?
• Programs to help the needy include food stamps,
housing assistance, Medicaid, and TANF.
• Eligibility and receipt is based almost entirely on
income. Little personal knowledge is sought or
utilized.
Errors in identifying and assisting the truly needy
are likely.
• No quid pro quos are established.
This leads to greater use and possible
dependence.
Government Programs – cont’d
• Moreover, incentives are lacking to improve screening
and establish quid pro quos. Few rewards for or
discretion to undertake.
• Large, private organizations may have similar problems
in motivating managers and employees. But:
- they must compete for donors and supporters
- donors and supporters expect evidence of success or funding will dry up
- the organization must find ways to solve any motivation problems of
employees
• Public organizations are tax supported; “donors”
cannot withdraw their funds if unsatisfied. Minimal
competitive pressure.
Supply and Demand Illustration of the
Outcome
NonMonet.
Price
(NP)
S
NP1
NP0
D
Q0S
Q1
Q1
Q0D
Quantity
Provided (Q)
• Think of the government program as lowering
the nonmonetary price of receipt and
supplying all comers at that price.
• Use of the provided good or service increases.
Because of lack of screening/assessment,
dependence is likely to rise.
• Private sector provision falls.
• Government budgetary commitment picks up
the difference.
SR and LR Elasticities
• The short run effects of instituting a policy
may look quite favorable due to low short run
elastiticites.
• Higher long run elasticities cause much larger
effects and generate less desirable outcomes.
• An “undoing” of the policy has unpleasant
short-term effects, making reform politically
difficult.
SR and LR Effects
NonMonet.
Price
(NP)
DSR
S
SSR
A
NP1
NP0
C
F
E
B
D
QS0
QSSR Q1
QDSR
QD0
Quantity
Provided (Q)
The Free-Rider Problem
• Poverty programs and free riders. It’s often
argued that there in a public good aspect with
the underprovision result. Compelling
payment through govt. alleviates this issue.
• This trades off with:
- welfare cost of taxation/subsidization
- ineffectual govt. provision.
Some Conclusions
• Where would government programs have the least
problems?
- needs are obvious; not subtle and complex
- response to the lower nonmonetary price is small
- examples may be natural disasters and accidents that
are difficult to anticipate and avoid
• Normative conclusions about the effectiveness/
desirability of public versus private provision.
• The hope is to assist instructors in addressing some
issues – fairness, needs, altruism – within the basic
framework we normally use.
Some References
Clark, J.R. and Lee, Dwight, “Government Transfers and Inequality: An Anatomy of
Political Failure,” Public Finance and Management, 8(2), 2008, pp. 265-301.
Clark, J.R. and Lee, Dwight, “Substituting Markets for Morality,” Cato Journal,
forthcoming.
Garen, John, “On Fairness and Needs in a Free Enterprise Economy,” Journal of
Applied Economics and Policy, 29(1), Spring 2010, pp. 61-78.
Heyne, Paul, “The Concept of Economic Justice in Religious Discussion,” in
Geoffrey Brennan and A.M.C. Waterman (eds.), Are Economists Basically
Immoral? And Other Essays on Economics, Ethics, and Religion by Paul Heyne,
Ch. 9, Indianapolis, Indiana: Liberty Fund, 2008.
Schansberg, D. Eric, “Common Ground Between the Philosophies of Christianity
and Libertarianism,” Journal of Markets and Morality, 5(2), Fall 2002, pp. 439457.
Also, Adam Smith and Ayn Rand views on morality, self interest, and markets.