DRI-231 for week of 1-19-14: How to Save Thousands of Medical- Patient Lives Annually and Save Money, Too

An Access Advertising EconBrief:

How to Save Thousands of Medical- Patient Lives Annually and Save Money, Too

The best-kept secret about economics is that its most famous practitioners are its least proficient. Most of what the general public knows about economics falls under the rubric of macroeconomics. That is another way of saying it is wrong, or at least wrong-headed. Meanwhile, microeconomics is the well-developed, solidly upholstered sibling of macroeconomics. It contains the body of general economic theory. It was born at least a couple centuries before macroeconomics had its modern unveiling. Today microeconomics lives a cloistered life behind ivy-covered walls, seduced from its cozy residence inside textbooks by the lectures of a select priesthood. Almost all the good done by economics in the world comes from microeconomics.

Microeconomics is often called price theory because its centerpiece is the theory of supply and demand that governs price determination. Prices are the common denominators that permit the expression of human valuation. And the refinement of a coherent, rational valuation process is what has lifted humanity out of the mire of poverty and stagnation and into the light of prosperity.

The last five years have made the poverty of macroeconomics painfully apparent. A recent op-ed in The Wall Street Journal demonstrates the potential value of price theory to save thousands of patients stranded on waiting lists for donated human organs for transplant. The op-ed is an ice-cold bath in the wellsprings of human reason.

Price Theory and Organ Donation
As with most countries in the world, the United States forbids the commercial sale and purchase of human organs. The “market” for organs, such as it is, is limited to highly regulated operations by non-profit firms that serve as clearinghouses for organs donated by private individuals under official auspices. In effect, both suppliers of organs and demanders face a market price of zero, which encourages consumers to maximize the amount they demand and suppliers to minimize the number of organs they supply.  This is a recipe for a shortage of human organs, and that’s just what we have.

At a market price of zero, the quantity of a transplantable organ that potential recipients want to acquire will exceed the quantity of that same type of organ that potential donors will wish to supply to the market. The difference – the excess of quantity demanded over quantity supplied – constitutes the marketplace “shortage” of that organ.

It is impossible to overstress the importance of this chronic shortage. It is the key to the predicament of participants in this market. When the amount of any good available for sale in the market falls short of the amount that buyers wish to purchase, some means must be found to ration the existing quantity supplied among the overabundance of buyers. In the market for transplanted organs, the rationing mechanism is placement upon the list of recipients awaiting a replacement organ. Each list member must await his or her turn. Economists call this rationing by queue.

In a garden-variety market, price rations the quantity sold. The equilibrating unit – the one that equalizes the ex ante amount that buyers wish to buy and sellers wish to sell – is valued equally by both buyers and sellers; that is why the equilibrium outcome is stable and could theoretically persist indefinitely. If the price were higher, quantity supplied would exceed quantity demanded and sellers would have unsold product. If the price were lower, quantity demanded would exceed quantity supplied and some buyers would be frustrated. Failure to produce up to the equilibrium point would strand production at a point where buyers value an additional unit of output more than producers value the resources necessary to produce that unit, while pushing production beyond the equilibrium point would require the expenditure of more money on the marginal unit produced than the value placed on that unit by consumers.

Under the shortage caused by the artificial zero-price environment, the human-organ market is highly unstable. This is a technical way of saying that the unhappiness of people on both sides of the market is a continual source of friction and momentum toward change. Economists have compiled a stylized list of the sources of unhappiness associated with below-equilibrium prices, called maximum prices. This list has its mirror image for prices held above equilibrium, called minimum prices.

Shortages: When prices are not allowed to equilibrate markets, shortages become        chronic. This accumulation of frustration among buyers can cause anything from mild dissatisfaction to riots in the streets, depending on the good or service in shortage. In  the former Soviet Union, prices of most consumer goods were set administratively wellbelow their equilibrium levels. Ordinary citizens waited in line for hours each day – or  hired people to wait for them – for a chance at these goods.

Black markets: When a legal maximum price causes the shortage, the key recipe          ingredient for a black market is present. Buyers want to pay more than the legal maximum for additional units of the good; in our case, they want it very badly. By definition, criminals are people willing to violate the law for personal gain. So we  should expect a black market to arise under these circumstances. (Despite this, authorities invariably profess shock and disappointment when it happens.) In wartime, price controls imposed by governments invariably cause the emergence of black    markets for consumer goods.

Discrimination by producers against consumers: There are more buyers than there are          units of output available to be bought, so producers can typically pick and choose the   recipients of that output. If producers have a “taste for discrimination” against certain consumers, they can indulge it without suffering the loss of sales revenue felt by aproducer in a competitive market. Because the cost of discrimination is reduced, we should expect to find more of it under these circumstances – and we do. In the U.S., prices and wages set administratively by governments, public utilities and unions historically allowed these bodies to discriminate against blacks.

Queuing costs: Since a queue substitutes for a higher price, we would expect it to impose real costs on consumers. The costs come in the form of waiting to consumerather than consuming immediately. In the human-organ market, waiting means   human suffering and death.

Quality deterioration: If a higher price is legally foreclosed, a possible alternative option for providing additional output is a reduction in the quality of the output. Quality deterioration is an indirect form of price increase that, while quite possibly inferior to the buyer, may still be preferable to not obtaining the output. In the market for donated human kidneys, this takes the form of utilizing an inferior substitute. Kidney dialysis is      a cumbersome, painful, costly and time-consuming process that can cleanse a diseased kidney of impurities for a limited time. This is the normal option selected by  would-be transplant recipients while waiting for a donor kidney.

An Application of Price Theory: Creating a Legal Market for Human Kidneys
Nobel laureate economist Gary S. Becker and colleague Julio J. Elias make the case for creating a legal market for human organs in their Wall Street Journal op-ed, “Cash for Kidneys” (1/18-19/2014).

By far the most commonly transplanted human organ is the kidney. In 2012, the waiting list for donated kidneys held 95,000 people, but only 16,500 kidney transplants were actually performed.In economic terms, this represents a chronic shortage of nearly 80,000 kidneys. For those people who finally succeed in obtaining a kidney via the queue, the average wait is roughly 4.5 years. The situation is not only dire but worsening. In 2002, the waiting list contained 54,000 people and the average wait was 2.9 years.

In 2012, about 4,500 people died while waiting for a donated kidney. Messrs. Becker and Elias propose changing the status quo to virtually eliminate the waiting list and the annual death toll. The means to that end is the creation of a legal, functioning market in which human kidneys are bought and sold at a market price. That would tend to equalize the number of kidneys demanded and supplied, thereby solving the problem.

The purpose behind the sale of kidneys is to gain a suitable organ for transplantation into a patient whose remaining kidney is failing. Transplant surgery is quite expensive and the follow-up treatment requires administration of extensive immunosuppressive drugs to prevent the body from rejecting the transplanted organ. The overall tab for the surgery and treatment is about $150,000. Yet this is a bargain. The kidney dialysis treatments required to sustain ailing kidney patients who await a donor kidney average $80,000 per year; an average wait of 4.5 years would involve total expenditure of $360,000 to produce only 1/3 the benefit of a transplant. (Since dialysis patients suffer pain and greatly reduced quality of life, this actually understates the advantage of the transplant.)

Becker and Elias have studied transplantation in countries that utilize an “implied consent” approach to transplantation, one which allows hospitals and doctors to take kidneys from the dead without obtaining prior consent or permission of relatives, unless the donor has explicitly opted out of donation beforehand. (American consumers would recognize this system under the name of “negative ballot.”) They find that the shortage of kidneys still persists. They estimate that a fee of about $15,000 would be sufficient to virtually eliminate the U.S. shortage. (Actually, they suggest a range of $5,000-$25,000, with $15,000 as a midpoint estimate. The authors note, for comparison, that the average fee paid to a surrogate mother is about $20,000.)This would increase the cost of kidney transplant surgery, but not nearly enough to affect the relative superiority of transplantation versus dialysis.

Becker and Elias wrote their op-ed for a knowledgeable audience, so they refrained from pointing out most of the time-honored principles stressed here. Perhaps the most subtle point omitted is the knowledge-gathering function performed by free markets. Markets collate dispersed information possessed by billions of people in fragmentary form by giving everybody an incentive to contribute to the information-gathering. A purely administrative market like the organ-donor market in its present form lacks this capability. Non-profits and foundations may have noble motives, but they cannot come remotely close to equaling the information generated by a functioning free market.

That is important here because kidney transplantation is a complex process. Organ and patient must be compatible in terms of tissue and blood type. The harvesting must be timed to preserve the kidney and effect the transplant as soon as possible. This is exactly the kind of process that is done badly by administrative fiat and done well by free markets. If the Becker/Elias proposal is adopted, it is likely that the process would be improved by the use of forward markets in which willing sellers would sell their organ for future use upon their death.

Becker and Elias conclude their case hopefully. “Eventually, the advantages of allowing payment for organs would become obvious. At that point, people will wonder why it took so log to adopt such an obvious and sensible solution to the shortage of organs for transplant.”

Arguments (?) Against a Legal Market for Human Kidneys
Viewed from any rational perspective, the case for a legal market in human kidneys would seem ironclad. The arguments against a legal market – if “arguments” is the right characterization – mostly revolve around the “repugnance” of the concept.

To be sure, the idea of buying and selling body parts is unfamiliar. Perhaps the image most frequently conjured up is the “body snatcher” who supplied cadavers to medical schools in 18th century Europe by surreptitiously digging up bodies from cemeteries and selling them. Of course, this is an example of the black markets described above; it is the kind of problem that legal markets solve rather than create.

The repugnance associated with legal markets for human body parts is a holdover of the millennia-old, instinctive fear and distrust of monetary exchange. In man’s tribal past, money conveyed the ability to transact beyond the boundaries set by the tribe. Tribe members could produce and sell directly to strangers and indirectly to people whose very identities were unknown. The power of the tribe were thereby circumvented and lessened. Transactions that were innocuous within the tribe were thereby forbidden outside the tribe. Certain activities became tainted by association with money.

That ancient taboo still lingers in aphorisms such as “money is the root of all evil.” Donation of organs is considered altruistic while sale is demonized, despite the fact that both parties to the transaction gain in either case and monetary transaction greatly enhances the scope of the market and total benefits generated. There is no rational basis for this taboo. Mankind has gradually evolved away from it, if only because monetary exchange greatly enhances our survival chances.

A related argument maintains that commercial transactions in human organs would coarsen our culture by deadening our sensitivities. It is not clear just whose sensitivities are at risk. Presumably it is not corpses from whom organs are harvested – to be sure, with prior consent or consent or surviving relatives. After all, the major religions and prevailing cultural norms encourage us in the belief that our bodies are mere physical shells that house our inner souls. Regardless of whether the soul survives physical death, the body is now mere refuse to be disposed of respectfully. Exactly how can it be politically de rigueur to recycle newsprint but unthinkable to recycle body parts?

Even more to the point, the sensitivities of transplant recipients are clearly left out of this accounting. One wonders how the 4,500 martyrs to the cause of cultural sensitivity in 2012 felt about the cause for which they gave their lives. Dialysis patients age 45-49 can look forward to an average life span of 8 years, compared to the 23 years they could expect with a transplant. Do they regard this differential as a noble sacrifice for the aesthetic elevation of society?

Since a normal human body contains two kidneys but can function adequately with one, healthy people can and do provide a kidney to sick people who need one. Opponents of a free market in kidneys foresee that the poor will be “exploited” in this market, either because they will be inadequately compensated or because they will suffer “seller’s remorse” and later regret the sale of their kidney.

It is bizarre to suppose that ordinary people can be called heroes for making a split-second decision to give their lives to save others in a fire or traffic accident, but the same people would be suckers if they made a carefully considered decision to sell a kidney in an orderly market. The tipoff to the political opportunism behind this particular argument is that other people insist it is the transplant recipient who is being exploited by the organ seller, who will demand an exorbitant fee and thereby profit unduly. Clearly, both parties cannot be exploiting each other; at least one of these arguments must be wrong. In fact, they both are. There is no reason to expect anybody to be exploited by a legal market for human organs. It is black markets that pose a danger of exploitation, and these would be replaced by the legal market.

It is ironic that when the rich and famous -Steven Jobs and Mickey Mantle come to mind immediately – somehow succeed in jumping the queue to obtain organs, there is the usual public outcry but the criers are obsessed with preventing the rich from being happy rather than with allowing the poor to enjoy the same benefits. This is where proponents of Obamacare should be concentrating their efforts – on providing catastrophic-care insurance to cover transplants and charitable donations for the uninsured.

Then there are the quasi-socialists who insist that nothing worth doing is worth earning a profit on. Since profit directs the flow of resources where they are most needed, no economist could make this case with a straight face. But it is guaranteed a permanent home on the political Left.

Almost 30 years ago, the author of this essay advanced the argument for a legal market in human body parts to his university economics class. Objections focused on presumed abuses; one student facetiously volunteered that “people would be selling granny.” Of course, creation of a legal market would replace the black markets where abuses by criminal suppliers were a foregone conclusion. The author pointed this out and went so far as to conjecture that black markets were even then operating. Subsequent investigations have vindicated that prediction, going so far as to report murder and abduction rings engaged in organ collection and at least one government allegedly involved in the practice.

There is no respectable intellectual argument against the legal market in human organs that Becker and Elias champion. Few if any free-market reforms can boast such an overwhelming case in their favor as this one.

Microeconomics vs. Macroeconomics
Compare the annual saving or upgrading of 80,000 lives more or less with the incapable efforts of the Federal Reserve and the President’s Council of Economic Advisors. This comparison indexes the relative merits of microeconomics and macroeconomics, respectively.

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