To buy or not to buy? Morality and markets

by Paul R. Koster and Hans R.A. Koster
Forthcoming in Radix / Click here for the Dutch version

There is a shortage of donor organs for transplantation, and patients in need of an organ are typically placed on years-long waiting lists. Unfortunately, every year many people die while waiting for suitable organs. Economists have argued that a free market is the most efficient way to distribute goods, so why shouldn’t we allow for a free market in organs? In the distribution of kidneys, there is already quite a lot of trade, as one only needs one kidney to survive. On the black market it seems that a kidney costs around € 5000 in India (De Jong, 2011). Kidneys are even cheaper in Nepal (about € 700). Many people are not comfortable with a market for organs. It is probably therefore that it is illegal to trade organs. However, if both parties (the poor guy in Nepal and the patient on the waiting list) improve their utility, why not make this market legal?

A traditional proponent of the free market probably has few problems with trading kidneys on the market. Given that both parties are free to make a choice to sell or buy a kidney, a free market improves utility and is the most efficient way to distribute kidneys. However, Michael J. Sandel, professor of political philosophy at Harvard University, argues in his most recent book What Money Can’t Buy that markets have ‘moral limits’. A reason is that Sandel observed an almost unlimited enthusiasm about the market before 2008, while after the economic crisis the idea of unlimited free markets has received critique. Sandel is not a proponent of a rampant free market and uses a plethora of examples to illustrate the shortcomings of the free market. For example: the selling of babies, paying to avoid the queue, betting on someone’s death, and private healthcare for the rich. Because of the huge number of examples, it is sometimes hard to keep track of his main line of reasoning. Nevertheless, we may observe three main arguments against the free market.

The first argument is related to inequality of opportunities. An additional euro is worth less for a billionaire than for someone who earns one dollar per day. In the example of the kidney transaction: somebody who sells the kidney for € 700 would not have done that if he or she had not desperately needed the money. Because of limited financial means, the kidney supplier may therefore not be totally free in deciding to sell the kidney.

Secondly, Sandel argues that free market trade may lead to crowding out of valuable social norms. The market does not only arrange the division of goods, but also has an effect on the quality of social relationships via norms, social justice, trust, respect and dignity. There are indeed a substantial number of psychological studies which confirm that the introduction of money incentives influences social norms and potentially may lead to a reduction in taking responsibility (Frey and Jegen, 2001; Gneezy et al., 2011).

Sandel also argues that by putting a price on a good or service, it may change the very nature of the good or service. If a supplier provides a product or service with a certain intention (for example: a performance that is available for free to everyone that is willing to wait in a queue), something essential to the good is lost if someone re-sells it for money. To put it differently: certain goods or services have a ‘sacred’ component (e.g. privacy, family ties, friendship) and trading of these goods will change the very nature of them.

The book does a pretty good job in showing that markets are not morally neutral. If that is the only goal of the book, Sandel is very successful: the free market may indeed have a negative external effect on social norms and the ‘moral capital’ of our society. Michael Sandel, however, has more ambition and aims to reconsider the role of the market in our society.

However, there are also a number of objections that can be made against the book. In the bestseller Justice, Sandel provides a more balanced view on the advantages and disadvantages of the free market. In What Money Can’t Buy, Sandel is biased towards the shortcomings of the free market: he ignores any positive effects of markets in his discussion. For example, free markets may also stimulate initiatives and innovations and promote social norms. Someone that has the option to compensate CO² emissions of his flight to London, by donating money to a nature conservation organisation, may also reflect more on his environmentally burdensome behaviour, and therefore may decide to take the train next time. It may even be the case that not implementing a free market leads to immoral behaviour. For example, if healthcare services would be free of any charge, one has an incentive to over consume healthcare (some ‘patients’ have indeed the tendency to bring unnecessary visits to the physician almost every day). This important phenomenon, which economists refer to as moral hazard, is not discussed in the book.

Because of the biased approach, the reader gets the idea that a market is not a proper mechanism to organise society. However, that claim is very hard to defend: there is substantial empirical evidence that societies have developed themselves because of free markets and related proper institutions (Acemoglu and Robinson, 2012). Nevertheless, there is more debate needed on whether the free market is a proper mechanism in specific cases (e.g. healthcare), and if the negative external effects on social and moral capital do not dominate the potential positive (monetary) effects. Besides economic efficiency there is a need for other criteria, something what is ignored in most academic economic studies. A good start would be to employ a broader definition of market failure, where not only market power and congestion or environmental externalities are included, but also social and moral externalities. Both moral philosophers and economists make claims about ‘the good life’. The integration of these scientific fields may lead to a richer and more complete view on peoples’ behaviour and will improve the credibility of economists in public debates on how to organise our society.

References
Acemoglu, D., Robinson, J.A. (2012). Why Nations Fail, The Origins of Power, Prosperity, and Poverty. New York: Crown Publishers.
De Jong, S. (2011). Psst, wat kost die nier van jou? NRC Handelsblad.
Frey, B., Jegen, R. (2001). Motivation Crowding Theory. Journal of Economic Surveys 15 (5).
Gneezy, U., Meier, S., Rey-Biel, P. (2011). When and Why Incentives (Don’t) Work to Modify Behaviour. Journal of Economic Literature 25 (4), 191-210.