Moral Dilemmas, Choice, & Economics

We often delve into behavioural economics when looking for depth in microeconomics analysis. This ties in with moral dilemmas as it is all ultimately down to the choices we make. To start off the Heinz Dilemma and Hobson’s choice will be considered.

Heinz Dilemma

In the Heinz Dilemma Kohlberg suggests that there are always six possible approaches to any problem encountered. Consisting of obedience, self-interest, conformity, law-and-order, human right, and universal human ethics. There are a few examples of this dilemma, which are well known but I will be using the original example.

In the original example the story is as follows:

“In Europe, a woman was near death from a special kind of cancer. There was one drug that the doctor’s thought might save her. It was a form of radium that a druggist in the same town had recently discovered. The drug was expensive to make, but the druggist was charging ten times what the drug cost him to make. He paid $200 for the radium and charged $2,000 for a small dose of the drug. The sick woman’s husband, Heinz, went to everyone he knew to borrow the money and tried every legal means, but he could only get together about $1,000, which is half of what it cost. He told the druggist that his wife was dying, and asked him to sell it cheaper or let him pay later. But the druggist said, “No, I discovered the drug and I’m going to make money from if.” So, having tried every legal means, Heinz gets desperate and considers breaking into the man’s store to steal the drug for his wife.”

From this there are six choices that present themselves so Heinz. I am going to list them from the example so we can get to the economics of it:

  1. Heinz should not steal the medicine because he will be but in prison, meaning he is a bad person or Heinz should steal the medicine because it is only worth $200 and that is not how much the druggist wanted for it; Heinz offered to pay and has no intention to steal anything else. (Obedience Example)
  1. Heinz should steal the medicine because he will be happier if he saves his wife, even if he serves a prison sentence or Heinz should not steal the medicine because prison is awful and he would languish greater in jail rather than his wife’s death. (Self-Interest Example)
  1. Heinz should steal the medicine because his wife expects it and he wants to be a good husband or Heinz should not steal the drug because that is breaking the law, he is not a criminal and he has done everything in his power so is blameless. (Conformity Example)
  1. Heinz should not steal as it is illegal as described by law, or Heinz should steal the drug for his wife, take the punishment, and also eventually pay the druggist. (Law & Order Example)
  1. Heinz should steal the medicine because everyone has the right to live regardless of law or Heinz should not steal because of the druggists right to fair compensation. (Human Right Example)
  1. Heinz should steal the medicine as saving a human life is a more fundamental value than that of property right or he should not steal the medicine because others may need the medicine as desperately. (Universal Human Ethics)

Through considering the variety of choices we have various equilibriums. The question we might want to ask is which is the optimal scenario. One may quickly realise there is no obvious option if you take it from a moral standpoint, but if we take it from an economic perspective we can examine the marginal private benefit, marginal social benefit, marginal private cost, and marginal social cost. This is due to the decisions at times having an effect on a third party that is not involved in the original transaction (that is the choices present to Heinz considering the druggist). Moreover, we can consider the Pareto efficient equilibrium considering who will be better or worse off.

In the first part of the obedience scenario Heinz is not necessarily worse-off as his wife is going to die if he does nothing, and there can be no Pareto improvement, as it would involve the druggist no longer having the drug. Would society be better off if Heinz steals in order to save his wife’s life? Since the disease is rare and special we may assume there is no demand other than Heinz’s. However, in this justification we encounter the potential problem a pharmaceutical company may face. In that if they go about developing a special drug surely they deserve some kind of compensation other than benefitting society. This to an extent depends on one’s economic view, whether we care more about the individual or society.

In the third example giving us conformity, it would seem to be the neutral equilibrium if he were to do nothing as mentioned above. If he were to conform in a sense to his wife’s demands he is not conforming to the norms of society so we come back to the issue of whether we consider societies or the individuals’ welfare of greater importance. In the fourth example we may argue that law in any sense is restrictive, and should not be needed for society, because we should be able to provide a social framework that would create an understanding for these scenarios. What if Heinz steals the drug then pays the druggist, should he still go to prison? I would argue that there is no longer a need for the law stating he should go to prison provided he pays for the drug as he has enacted a social framework not requiring the law to be in place.

The fifth example brings up the issue we may find with patents. Does an innovator deserve compensation for his work through price setting power? In this case the druggist has enacted monopoly power by price setting. As the druggist charges $2,000 when it cost $200. Then we have the inelastic demand, as Heinz effectively needs the drug and has no other choices available. This is a clear abuse of power that is afforded to the druggist through property right, and is not increasing anyone’s welfare. The druggist could take the $1000 offered or take the payment in full later, but chooses to be bullish due to the position held.


 

Hobson’s Choice

This is a special case of take it or leave it choice, whereby there is a false perception of free choice between any good. Thomas Hobson who owned a 40-horse stable where customers hired the horses developed this theory. Seeing the 40-horse stable suggested the variety of choice available and the perception there was free choice, however the condition was that the horse nearest to the door of the stable was the option and the other option was to have no horse at all.

An ultimatum game is effectively a form of Hobson’s choice, taking the classic example of a pot of money being split by two people with one person the proposer and the responder, as the proposer gives a take it or leave it choice. Results in this game often depend on the type of society it is tested in. Below is an example chart of this trade-off, noting that people believe that a 50/50 split is fair:

Screen Shot 2014-12-03 at 00.56.39

In Hobson’s case this ensured that the best horse was not picked every time, allowing that horse to rest in order to maintain its condition, while forcing the user into a choice. This may mean that in the long-run there are better quality horses available for riding, however in the short-term the consumer has been mislead about the opportunities available. Therefore, it comes down to the quality of horse presented to them at the door as to whether they take it or leave it.

Sources:

Kohlberg, Lawrence. The Philosophy of Moral Development: Moral Stages and the Idea of Justice. San Francisco: Harper & Row, 1981. Print.

Graph:

COREECON PROJECT

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The Patent Dilemma

In simple terms patent law is frustrating. There is a strong rational argument for keeping patents and abolishing them. Those who innovate deserve some kind of compensation for their efforts, however even temporary monopoly leads to inefficiency and does not best benefit society. In the following I will consider the arguments for and against patents.

There are four central arguments that were used to justify the patent system of the 19th century. Taken from the book “The Patent System and Inventive Activity” by H.I. Dutton.

The Natural-Law Thesis

This thesis is based on the assumption that individuals have a natural right to property of their own ideas. Using others ideas was tantamount to theft as it was private property. Even supporters of the patent system would not go far to advance this argument. William Hindmarch noted that an inventor couldn’t have any natural right to prevent another person from making or using a similar invention summarises the breakdown of this thesis, on the basis that being loosely defined no boundaries are set as to what is a unique and individual idea.

Reward by Monopoly Thesis

The base argument of this thesis is that inventors should be rewarded according to the usefulness of their invention, since market forces may not always guarantee it. Adam Smith and John Stuart Mill were patrons of this argument as he noted the importance of the rule of law, and the institutional framework, which corrected market failure.

This is beneficial because allowing inventors monopoly ensured a period where they would gain sufficient return for the effort, without this protection competitors could in theory lower their costs at no cost. Introducing the free riding problem to the benefit of others inventions. In any case there was the argument they were harmless, market forces would determine the profitability from the invention, if it were a useless invention then there would be no reward.

Jeremy Bentham also distinguished between two categories of labor. In that there was the physical variety whereby it could be imitated with similar reward. Then the skilled variety where progress would reduce cost of production, rather than simply add to production.

Monopoly Profit Thesis

Private rewards was a clear incentive to invent, it differs from the rewards argument as it concerns itself with the duration and exclusiveness of the monopoly. Noting that it is economic growth for society that is ultimately desired. So in this sense growth and private profit would go hand in hand. There is evidence for this link in that many claimed that patents were integral to the creation of the most valuable inventions.

There was also the aspect of the speed at which innovation was carried out when patents were under use, this applied to foreigners and domestic inventors as the patent system enabled both equally to pursue invention, while securing the industrial basis of the economy.

Exchange-for-Secrets Thesis

This was based on the 18th century idea of contract, whereby a bargain occurred as one received protection and the other received knowledge. This thesis emphasised the importance of disclosure. This theory was not concerned with output but rather the dissemination of information of the existing technologies.

This had led to the more complex nature of patents, requiring full disclosure of the technology or inventions in a specification, in order for law officers to make provisions for the patent, established in 1734, and emphasised in 1778. Simply put by John Farey patent is the price of disclosure.

Anti-Patent

The greatest fear about patents was the manner in which monopoly was pursued, noting the particular evils associated with monopoly to ward off the use of patents. The counter-argument was rather that patents had brought what was private discovery into the common, and that just because the monopoly existed did not mean that market would demand it, or that an artificial price increase could be maintained. There was also the notion by William Spence that monopoly prompted a specific type of competition.

The main ideology behind the anti-patent movement was on the basis of free trade and the emancipation of industry. This had gained better grounding after the Corn Laws were repealed and the navigation acts took place.

  • Dangers of monopoly, negative effects on workers, manufacturers, etc.
  • No longer necessary due to a mature economy, firms able to compete normally without special privileges
  • The Economist argued it was immoral and economically unsound
  • The lottery nature of patents, whoever got the idea first by chance
  • The inefficiency of how patents were administered, and the lack of protection they actually offered is the main factor that put off inventors.

Against Intellectual Property – Boldrin & Levine

The example of James Watt’s new engine shows the limitations of patents, after initially having to spend six months obtaining a patent, he then spent time combating off rival inventors, to which the patent was then extended. Then after a period of commercial production his advanced engine had only sold 449 units of the 2250 steam engines around. A patent also limited him with the technology he required being the property of James Pickard.

This situation effectively describes Watt as not only an inventor but able to exploit the legal system, noting that his partner had strong connections in parliament. The legal system was used to limit competition, with evidence of limited adoption of steam engine innovation due to Watts’s monopoly. It is also worth noting that Watt spent more time on legal matters rather than inventing. This is summarised as rent seeking behaviour; this is shown through the patent extension that was not needed but favourable for Watt. In the conventional monopoly manner high prices prevented others from entering the market.

Most often attributed to the patent system are the evils of monopoly, corrupt rent seeking, legal suppression of innovation, reduced economic growth, and the los of personal freedom. It is argued that innovation would thrive in the absence of intellectual monopoly. This is brought up next to the concept of free trade and what used to be extreme protectionism. With the authors arguing that today there is the violation of intellectual property laws in that consumers desire cheap books, music, etc. in convenient format and are willing to violate law for it.

The legal framework is as follows in levels of protection of intellectual property: Patents, Copyrights, and Trademarks. Copyright tends to the specific, whereas patents provide broad protection over a general idea. The Right of Sale is a fair concept in that inventors should be able to profit from their work, the right to control however results in prosecution carried out by government.

Intellectual monopoly may be denoted as the right of the owner of the intellectual property to dictate how the purchaser uses the idea and or limiting them. Concept of first mover advantage, should still command a fair premium on the market? Economists favour competition over monopoly on the basis of freedom of contract and well-defined property rights. Shrink-wrap agreements are effectively enforcing collusive contracts. Their argument suggests that the right of sale should be present but then whoever completes a legal purchase and owns a copy now has the right to use the technology however they would like to. The law inhibits the potential of creativity. Similar analogy created between intellectual property and trade restrictions, looking at the transmission of goods being superior under free trade. The reward for invention argument is limited.

Milton Friedman notes the dangers of occupational licensure, but makes a notable point in that there seems to be support for such laws, as the producer group will always be more concentrated then the consumer group (Capitalism and Freedom, Page 143).


The outline of these arguments shows that there is validity in either approach, making the next requirement a look at examples. But rather than making a solution clearer, it goes on to complicate it further.

Take one of the most popular examples: pharmaceutical companies. We understand that there are high costs associated with the research and development of new drugs, therefore firms would like to be compensated for their effort and innovation. However, this tends to price drugs at a level unaffordable for the vast majority of society. Then on the consumer side this means the lack of consumption of a merit good. In the United Kingdom the National Health Service subsidises the cost of drugs in order to ensure and encourage consumption, such as free drugs for those in full time education. Nevertheless, this is limited as the NHS must choose which drugs to subsidise, and what degree to subsidise them. Firms may aggressively price increasing the burden on the NHS, this is often the case with brand new drugs.

Now if we consider paracetamol, the moment the patent ended the market was flooded with new brands all delivering the same product. Now a consumer can get paracetamol of 500mg pills from Sainsbury’s at £0.55, this effectively allows it to be consumed by anyone. The low price a consequence of extreme competition, and economies of scale resulting in mass production.

If we take the idea of altruism and greatest social benefit, we would look to reduce the comprehensiveness of patents. This brings forward the question of how much innovation should be rewarded it terms of length of patent, we leave the market forces to decide how well the innovator fares, but regardless it may stop others from innovating, lead to legal disputes, and tends towards what we see as the “evils of monopoly”. I personally believe that the anti-patent argument tends to over emphasise first-mover advantage, as in a world where communication occurs at increasingly higher speeds, information can be spread quicker then a firm may act.

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Planning & The Rule of Law

Hayek

A government should ultimately be bound by rules that are fixed and announced before it takes up any activity, this allows an individual to plan how they will go about their affairs, or in a more macro sense how firms should behave as they understand the manner in which government may use coercive power. Of course this system is not perfect in that the creators and administrators of these laws are fallible.

However, it does create the assurance that a pursuit of certain aims will not be stifled by a governing body, in the case where all the conditions are realised, so that law rather than stifling freedom allows it to flourish. Here Hayek makes a distinction between the rule of law which enables a government to fix conditions in which resources are used, but the ends they meet is ultimately decided by the individual, and arbitrary government where it directs the means of production to particular ends.

Central planning cannot allow the first to exist, in that the formal rules we have provide a framework rather than step by step guidance, central planning would require these rules to be exact in what they suggest in that the particular ends are met, and it is not by the individuals whim the product of these means. Here arises another problem with central planning and as such collectivism. When a government has to make every decision framework rules are useless, imagine trying to solve at this very moment how many buses should operate. Whereas in our current society the government provides the legal framework for their operation but it then comes down to competition, market forces, etc. which decides the operation of buses. A controlling government would have to make this decision under the circumstances that the problem arises, and this means that it would have to balance all the different aims and needs at that given moment as to not favour one, but inevitably somebody’s views have to be given greater significance.

Hayek uses the example of the Highway Code, which does not instruct people on where to go and exactly how they go about it (planning attempts to do this), it instead offers a framework in which the individual can operate but also ensure that society is not harmed, and is better off on the whole. It is here that the concept of formal rules is developed, in that we create rules that are useful to a yet unknown people, under circumstances which cannot be foreseen in detail.  They are formed on the basis that society is better off due to their existence. Thus, this avoids the need of dealing with each individual’s means and ends, the recognition that precise results are hard to come by, and that by providing a structure of which everyone is aware of, everyone will be better off.

Micromanagement is unsuccessful as concrete rules for a given situation would have to be applied, but we lack this information, and in the ultimate end only one aim can be pursued as otherwise it may conflict with another. Thus Hayek notes that the state should confine itself to providing rules to general types of situations as only the individual currently in the current circumstance possess the correct information to make a viable decision. Also there is the recognition that we cannot see into the future, the state would struggle to see the effect of certain actions on particular people. Furthermore, the state chooses between the different ends consequently favouring one over the other, as it cannot know what would have happened if the other aimed were to be picked. Thus planning in regards to law in the creation of definite rules means that it perpetuates the problem of asymmetric information, whereas formal rules reduce the asymmetry’s influence.

Hayek emphasises that as planning becomes increasingly extensive the struggle in asserting what is “fair” or “reasonable” increases. Providing the need for more authority in making executive decisions, and that this facilitates more deliberate discrimination between the particular needs of different people. It would ultimately determine how “well-off” a certain person will be compared to another, in that only one’s needs are met through this discrimination in choice. The rule of law in a non-planned system ensures that there is an absence of legal privilege. Hayek establishes the paradox that in aiming for equality it is necessary to facilitate a legal system in which not everyone is equal in front of it.

“To produce the same result for different people it is necessary to treat them differently.”

The rule of law undeniably can lead to economic inequality (but to some extent this is the only thing that is truly inevitable), thus socialism protests against “formal justice” in that judges are too independent for example. Hayek ascertains that the rule of law is only effective if it is universal and as such does not work in socialist system, in which again there is the breakdown of political freedom. “It does not matter whether we all drive on the left or on the right-hand side of the road so long as we all do the same.” Rules are meant to enable us to predict each other’s behaviour to a needed extent, in that I won’t drive onto the motorway and find that people are driving in the opposite direction.

The individual should be able to foresee the actions of the state on the basis of the rules of law, and as a consequence use this knowledge to form his own plans and how he goes about his affairs. Here the individual knows where the state can stifle his efforts, and that it is not set arbitrarily on the specific circumstance of that moment. From this Hayek makes an acute reference to the Enlightenment:

“Man is free if he needs to obey no person but solely the laws” – Immanuel Kant

In a socialist system the rule of law will be applied in a manner which is as if a person were to be commanded by another. Legislation in a democratic government is confined by the continued discourse and disagreement, whereas in a socialist system in will be pushed through ultimately serving one individual’s ends at the cost of another.

When a state embarks on the complete control of economic life the significance of minority rights, and individual rights are diminished, without even breaking the rule of law at times. Hayek states that ruthless discrimination occurred through a change in economic policy first before and statutory change. Due to the nature of Socialism and the need for an overriding decision to be made, power lands in the hands of few and in that there is the inevitable service of their vested interests, or an ability to go against a large minority.