Saturday, September 4, 2010

When social mores and free markets collide

I would like to try something different for a change this Labor Day long weekend. In these pages I have been an advocate of examining assumptions so that a modeler can understand the weaknesses of his models. With that thought in mind, here are a thought experiment that I would like to conduct. Bear in mind that there are no right or wrong answers, only better answers about yourself and your world views.

The plight of the Chilean miners
Economists generally like free markets as they are efficient allocators of resources. But what happens when free market principles collide with social mores?

Consider the plight of the 33 Chilean miners who were trapped underground by a rock slide. The plan is to drill a hole roughly half a mile down through solid rock to rescue them:
Walter Herrera, quality control and risk manager for the Chilean mining company GeoTech, has said his company was bringing a specialized device typically used for boring water holes to the mine. The drill would use one of the three bore holes already made as a pilot and widen the diameter to about 28 inches, which officials have said is wide enough for the miners to be hoisted through.
Here are some questions, as a thought experiment, as a litmus test of true belief in free market principles:

  1. Mining is a dangerous profession and the miners knew the risks. Certainly they would have been paid a risk premium for dangerous work and someone with rational expectations would have bought insurance to prepare for such an event. Drilling down half a mile through solid rock using specialized equipment can’t be cheap. Given the costs involved, do they deserve to be rescued?
  2. If the answer to the previous question is “yes”, then who should pay for the rescue? If the company pay, has it done a cost benefit analysis of paying compensation of no rescue vs. the cost of a rescue? (Does the company bear any legal liability in this case given the miners knew that they knowingly took risky jobs?) If the government pays, doesn’t that just socialize the costs, just like the banking bailouts? Should the miners themselves pay? After all, they should have known that mining is a risky job and therefore demanded a risk premium in their wages. If that was the case, why would they not have hedged (bought insurance) against such an eventuality? In the tradition of Hayek and Friedman, they were free to choose their own risk profiles.
If you find these questions objectionable, then how do you react to a hypothetical case of an American without health insurance who is diagnosed with cancer? Should the patient be asked to pay for his or her care? What if the cancer is not immediately life threatening and care was not mandated? Is your answer any different from your previous answers about the Chilean miners?

What about these issues raised by Brad Delong on the segmentation effects of genetic testing on the life insurance business? We can identify with the Horatio Alger story of the self-made man. Free market principles are about creative destruction: aallowing people to succeed (and allowing failure). What are the effects when someone wins or loses the genetic lottery without any action on their own?

Isn't the practice of genetic screening just the free market at work?

Back in the days of the Soviet Union, there were endless essays about the "purism" of various schools of Marxist thought. This has been a self-test of the purity of adherence to free market thoughts.

Remember, there are no right or wrong answers, just insights about yourself and your assumptions about the world.

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