Trusting strangers

by Russ Roberts on September 14, 2009

The other day I was speaking about swine flu with a friend of mine who’s a doctor. She mentioned she was going to be getting vaccinated soon. I hadn’t realized there was a vaccine and she said there was, but there was a shortage and to start with, health care professionals would get the first access. I mentioned in an offhand way that there was a shortage (as there sometimes is with other vaccines) because the government had stopped letting companies make profits from vaccines. As a result, the number of companies making vaccines has dwindled dramatically. Her response was fascinating. She said she would never trust the vaccine produced by people trying to make money during a crisis.

It was a perfectly reasonable response and a response that of course, is totally at odds with my view of trading with strangers motivated by profit. My view is a distinct minority, and reasonably so. At first glance, you should be skeptical of people who sell you things. They, after all are motivated by the money. You shouldn’t expect them to look out for you.

But they often do, of course, for all kinds of reasons—competition, future sales, to enhance their brand name, cultural norms.

What is interesting is that I think my friend, who is a wonderful doctor, would be offended if I had suggested that she after all, makes money off her patients and yet she is trusted. And again, this is a perfectly reasonable feeling on her part. She sees herself the way I see a vaccine company and its employees in a competitive marketplace.

Our conversation reminded me of this week’s EconTalk conversation with John Nye. John talks about people’s distrust of anonymous exchange and markets in the middle of a crisis. John has some provocative things to say.

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slocum

By that logic, then, you should avoid buying goods and services when traveling (because you'll never see the seller again)?

But, of course, the incentive is still there because if you are badly treated, you may tell others about it. You may not know the seller's other customers and prospective customers, but you really don't have to -- especially in the age of the Internet, it's quite easy to complain publicly in a way that others will be able to see.

You wouldn't trust a profit-making organization in a crisis? Compare Walmart's response to Katrina to the various state, local, and federal agencies:

http://www.washingtonpost.com/wp-dyn/content/ar...

Why was Walmart so much more effective? First, because Walmart is run by people who are very good at their jobs because they are continually tested a competitive marketplace, not by politically appointed hacks (heckuva job, Brownie). And, in that competitive marketplace, Walmart saw not only an opportunity to do good, but to earn the esteem not only of customers who were being helped, but customers and potential customers throughout the country.

Government agencies, on the other hand, have much weaker incentives--no matter how badly they perform in a crisis, they have no fears of being replaced by a competitor. In fact, it often happens that a slow, chaotic, ineffectual performance by a government agency serves as a 'useful' demonstration of why the agency needs more funding, more employees and a bigger bureaucratic empire. Conspicuous failure is obviously bad for those served by the agency, but can be good for the health and well-being of the agency itself. Profit-driven corporations don't work that way (and thank god for that).

Don

Russ-
Ask your friend if she would trust a vaccine that was made because the government said it had to be made.

vidyohs

:-) by the lowest bidder, of course.

vikingvista

"she after all, makes money off her patients and yet she is trusted."

You have to understand, that no single group in the history of sentient beings is more deserving of the phrase "how can someone be so smart and yet so dumb", than physicians.

Justin P

Politicians? But then again they do have an incentive to play dumb.

Lawyers maybe?

No wait, HS history teachers! My wife had a history teacher that told the class that the Holocaust didn't happen. She, the teacher, never got fired because of the union, instead she got moved from teaching HS history to grade school (1-5) to fill even younger minds full of utter nonsense.

muirgeo

"I mentioned in an offhand way that there was a shortage (as there sometimes is with other vaccines) because the government had stopped letting companies make profits from vaccines. "

This is simply not true. If there were no WHO, or CDC or FDA or HIH there would likely be NO vaccine at all much less a short supply. As it is there were initially around twenty vaccine manufacturers with licenses to produce seasonal influenza vaccines. There are other qualified vaccine manufacturers who are preparing to make influenza A (H1N1) vaccine, but do not yet have a licensed seasonal influenza vaccine.

geoih

"If there were no WHO, or CDC or FDA or HIH there would likely be NO vaccine at all much less a short supply."

Are you saying that the medical and pharmaceutical industries are so disinterested or incompetent that they couldn't find their way to do this unless forced by the government?

Justin P

Muirgeo has the basic assumption that everyone is exactly like himself. So I'm sure he does think everyone is basically incompetent.

udctrox

I see the doctor's point if this situation had actually escalated to a complete pandemic emergency where people needed to consume the vaccine in 24 hrs or die. At such a juncture, there might be some profiteers who would come up with spurious/adulterated vaccines to prey upon the people's desperation and ignorance because the regulating agencies might then relax their rules in the face of an emergency.
We are not there yet.
Right now is a great time to open it up to the private market. The companies would compete for this (many potential customers) and this would result in better quality, and reduced prices.

Seth

Interesting perspective from the good doctor.

I know people who would rather others go without flashlights, generators or gas in a crisis than enrich profiteers.

But, they have willingly paid more when they were in similar situations (not quite disaster proportions).

And I don't recall them ever loading up their vehicles with basic supplies to take and give away to people in disaster areas.

Ecommunist

Russ' doctor is not uninformed or ignorant. She is self-interested, as is everyone else. It is in the interest of healthcare providers to restrict the market and reduce competition, because doing so increases their potential for profit. Of course, these rent-seekers will rationalize their criminal behavior by saying that the market needs to be regulated for safety reason.

Curious

Don's friend is maybe a wonderful doctor, but she's obviously clueless when it comes to economics. But that's OK.

The problem is that by casting a vote, millions of morons like her make decisions on the very issues on which they are so clueless. Democracy is the problem.

danielkuehn

She's not clueless. She's wrong, but she has a clue.

She recognizes that the incentive for honesty emerges from "repeated games" and that in a crisis there is a lower likelihood of "repeated games". That's a fantastic economic insight on her part! Just because she's ultimately wrong doesn't mean she doesn't have a clue.

Curious

Daniel,

while on vacation, I had a hunger crisis, so I went to a restaurant and got myself out of the crisis. Should I have been worried about the lack of "honesty incentive" due to lower likelyhood of "repeated games"?

danielkuehn

That's an irrelevant example.

In what way is you being hungry an unexpected massive increase in demand? In what way does that restaurant owner not have a stake in maintaining his business on an extended basis?

Curious

It was unexpected, because we didn't expect to stop at that restaurant.
It was massive (30 tourists in a tiny restaurant).
We will never eat there again - the basis of our business dealing was that 1 dinner.

Seems to me that the example is relevant.

Justin P

Game theory has nothing to do with it. Why are you trying to repeat Naomi Klein's fallacious argument from Shock Doctrine?
Do you think Klein is right?

danielkuehn

I've never read anything Klein has written, but the few youtube clips I've seen of her have convinced me I'm in pretty strong disagreement with her. What is her "shock doctrine"?

I'm actually pulling this from a workshop I attended that was directed by a GMU econ professor, Bart Wilson. Markets depend on trust. Trust is built to a large extent by the prospect of repeated business interactions. I made the (I thought) not too crazy leap that suppliers in crisis situations are less likely to be interested in or have prospects of repeated business interactions, compared to suppliers in normal conditions. Thus, less incentive to be trustworthy. What's wrong with that logic? I don't think you need someone like Naomi Klein to defend that.

Justin P

Markets run more efficiently with trust but they are not dependent on it. If we had to explicitly trust everyone we did business with, there would be no need for warranties or insurance. Either that or we would never engage in trade to begin with.

I made the (I thought) not too crazy leap that suppliers in crisis situations are less likely to be interested in or have prospects of repeated business interactions, compared to suppliers in normal conditions.

That's a very large leap to take. While it's true that there are always charlatans out there running fly by night operations. Do you have any data to support your assertion that they would have a disproportionate market share during a crisis? That's the only way your argument holds any water.

I would say read her book, but that would be like buying a Kanye West album, I wouldn't want to reward bad behavior. Needless to say, Shock Doctrine is all the rage in socialist circles (Undergrad English, and Soc depts).

danielkuehn

I don't recall asserting that they would have a disproportionate market share. Did I? What I said was that there would be a lower likelihood of suppliers who are interested in establishing themselves permanently, and therefore lower incentive to be honest. I'm still not clear on why that isn't self-evident.

I agree with your first paragraph in it's entirety. Repeated interactions is only one mechanism for building trust - explicit contracting works too.

Justin P

And what I'm referring to, is that the suppliers that are supplying in a crisis are the same ones that are supplying during regular market conditions.

No doubt the incentives are lower, but suppliers would, in my estimation, actually go above and beyond what is normal decorum during a crisis to build trust with consumers.

danielkuehn

To which I'll pose the same question I did above:

Why wouldn't the same profit motive that causes existing suppliers to increase production also lead to market entry? The prospect of additional profits always leads to both. And, how exactly do you suppose drug companies scale up production so significantly? They contract with new manufacturers.

Certainly in a situation like Katrina new suppliers will enter - probably significantly moreso than with vaccines.

But you need to explain why the profit motive increases intensive production but doesn't increase extensive production.

crom

Russ, not Don...

randian

She said she would never trust the vaccine produced by people trying to make money during a crisis.

So she wouldn't trust an ER doctor who got paid to save her life?

P

Does your friend trust food produced by people who are (HORRORS) trying to make money?

After all, everyone needs food or we'll die. Can we trust the free market to provide it? Shouldn't we be trying to pass a national meal plan?

Justin P

Would she trust water, that somebody brought in from a neighboring county if there was a disaster? OMG those profit motivated people might have poisoned the water....killing future customers.
Hey wait, is that what she does to her patients? Of course not, so why does she think so low about other people?

Justin P

Russ, my response to her would be (and I'd only say this because I don't know her personally) that she is doing the exact same thing that she berates the pharm companies for.
As a doctor doesn't she make profits off of other peoples sickness and misery?
If someone is having a heart attack, isn't that a crisis?
As a doctor she treat that patient, doesn't she still expect payment for services rendered afterward? Or does she only charge for preventative medicine?
I have a lot of friends that are doctors, dentists and scientists, I'm a chemist and went to school with a lot of folks that entered the health professions. One thing I know for absolute sure, is that they are not a bright as people want to believe. Now to be sure there are a lot of bright MDs out there, but I'd wager the majority really aren't any smarter than your average layman, and most are so ignorant of economics, it's ridiculous. Most undergrad programs in the sciences don't even require any econ classes, so it's safe to say that at least economically speaking most if not all the MD, DDS etc are just plain ignorant. So the response from your doctor friend is no surprise.

Exit question: Why do people want to believe that their doctors are these smart all knowing people?

crawdad

Justin,

It relieves them of responsibility for informing themselves about their own healthcare. My wife is in the healthcare field and and being around doctors and nurses throughout much of her career taught her just how fallible they are - only human. For instance, my wife (a pharmacist), can tell which drug company rep has made the latest round of local doctors' offices by the preponderance of prescriptions being written for specific drugs.

Trust them? In healthcare and in every other exchange, the adage should be trust but verify.

Justin P

Exactly my point.

Ken M

I suppose a lot of it come down to a sloppy use of the word "trust". I might trust my family, next door neighbor, or minister as good people who are truly concerned for my well being. On the other hand, I might consider the heads of pharmaceutical companies as cold-hearted people who are concerned only with profits and wouldn't lift a finger to save my life unless there was something in it for them. How fortunate, because non of those good, loving, trustworthy people I mentioned above have the slightest competency in designing and producing anti-virals or vaccines, nor do they have the staggering amounts invested in the capital required to produce and distribute them. In contrast, that much maligned pharmaceutical robber-baron not only has all of those necessities, but can best satisfy his search for lucre by selling me exactly what I need. Only by doing the best possible job of this can be maximize the likelihood of being able to continue in his "untrustworthy" ways. When my life is on the line, I tend to put more trust in competency and motives than in noble intentions. As far as the public ignoring response to black swan events, I suspect that the these rare events play a much larger role than day-to-day performance in forming public perceptions. How many people judge FEMA or the Army Corps of Engineers based on their long records compared to their alleged poor performance during Katrina?

AdamGurri

No offense to your friend, but it's easy for her to say when she's among the favored few who will get first access.

Justin P

That was my initial response as well.
It always looks different sitting in the Ivory Tower doesn't it?

Economiser

Agreed. I wonder if Russ's friend would feel differently if the only alternatives available were buying from a profit-making company or not getting a vaccine at all?

Justin P

Of course she would. Once her and her family come down with symptoms, see how fast she'd be running to "profit motivated" private suppliers for a vaccine.

This is like the Wal-Mart argument. Libs love to complain at Wal-Mart about workers rights, benefits blah blah blah...yet continue to shop there. They don't put their money where there mouth is.

danielkuehn

Of course I fundamentally agree with you on this, but the crisis situation does raise at least one interesting point. When we're dealing with these "hundred year flood" type events - hurricanes, pandemics, what have you - the desire for future customers has to be a weaker incentive than in normal situations. Maybe established pharmaceuticals would still have an incentive, but would their suppliers that jumped on the singularity of a profit opportunity have the same incentive? Moreover, on the demand side the fear of these singular events has to diminish competition by diminishing the willingness to shop around too much.

Obviously neither of those refute your basic point, nor are they intended to. But I think that's what largely separates the "profit earners" from the "profiteers" in peoples' minds. The trust of stangers the doctor relies on has emerged over time, under the understanding that that trust will be necessary to rely on in the future. That history of trust and the necessity of relying on trust in the future isn't the same during a crisis.

vidyohs

I have a big bathroom with an ample tub for mixing stuff, I think I'll go into the flu vaccine business, aka DK's ideas. I mean hell it doesn't take a team of researchers and developers, scientist obviously can be rounded up on a moments notice to respond to the 100 year flood of need. You bet, I think DK is on to something.

Oh but wait. I have never sold a vaccine before, not to anyone. Gosh, how do I get by that physician's suspicions?

Egads, DK, astounding brilliance.

danielkuehn

Huh? That's barely coherent.

Explain to me why the profit motive that we agree will encourage existing companies to redeploy resources towards a scarce vaccine won't also encourage the entry of new companies. You can't have your cake and eat it too. I'm not sure what playing in your bath-tub has to do with it.

vidyohs

Duplicitous Kuehn,

Explain to me how anyone can explain to you.

Very knowledgeable people in their fields, including the hosts, have tried "splaining" to you, and it rolls off you like water off a ducks back.

danielkuehn

I don't think that either of the hosts have ever contended that the profit motive works to increase production from existing producers, but does not encourage new producers to enter the market.

Indeed, Don's concerns about antitrust legislation are fundamentally grounded in my point that the profit motive introduces the threat of entry of new firms.

russroberts

Huh? Why would the vaccine be produced by someone out of the blue? If we had the seven or so producers we used to have for vaccines, they would compete to provide this one. Just because the event is rare doesn't mean the provider is going to be a once-in-a-hundred years manufacturer.

vidyohs

BTW,according to a report in a U.K. news source recently, well over 50% of medical personnel in Britain are refusing to take the vaccine. They are objecting that #1 it isn't necessary and #2 it hasn't been tested sufficiently.

danielkuehn

For more standard vaccines, of course.

But can existing manufacturers immediately scale up capacity for a brand new strain of a virus in a matter of months? If they could then I don't think we would be calling it a "shortage". Presumably, the unique profits of this unique circumstance will bring other aspiring manufacturers into the market.

Your response is like saying "there should be no shortage of construction workers in New Orleans in the fall of 2005 - just because the event is rare doesn't mean the provider is going to be a once-in-a-hundred years contractor". Yes, normally there are enough contractors to supply the city of New Orleans. But post-Katrina, I imagine there was exceptional and unusual demand that lead to many contractors setting up shop who had no need to establish long-term trust. Why? Because they were only interested in making a quick buck on shoddy work and then moving on.

I'm not trying to refute the market as a solution to shortages. I'm just saying that the normal market mechanisms that build trust aren't always in place for all providers in a crisis situation, which I think is the origin of these concerns in the first place.

Seth

"If they could then I don't think we would be calling it a 'shortage'."

Are you referring to the shortage caused by the removal profits?

Re: New Orleans, that's a plausible-sounding story, but do you have any facts to share? I can just as easily envision honest and reputable contractors going there to earn good business and build on their reputation or good upstarts out to make a name.

Key question is whether Professor Roberts's doctor could distinguish those coming in to trade good work for profit and the con men.

danielkuehn

I was refering specifically to a shortage caused by the absence of productive capacity - but obviously a contributor to that would be the disallowance of profits. I think even without that, though, no existing capacity could produce vaccines to a brand new virus immediately on demand - there will be a temporary shortage. And the prospect of supplying that shortage will encourage greater production by existing suppliers and new suppliers coming online. Is that that hard to accept? I don't think it should be. Same with New Orleans. And of course a lot of them will be honest people.

The question is the incentive to be honest. And even if most or all of the new entrants are indeed honest, I think we can all expect that they will have less incentive to be honest than existing producers by virtue of the fact that they are more likely to have temporary aspirations. I should hope con men are in the minority! It's just something interesting to think about that the doctor brings up. Market institutions provide an incentive to be honest, largely because of the dependence of profits on "repeated games". If repeated games aren't a part of the picture (ie - someone coming in to build houses short term), shouldn't we expect the incentive to be honest to be lower? That's very different from saying they're all con men. I'm obviously not saying that.

randian

In the absence of state licensing laws, there wouldn't have been a shortage of contractors in New Orleans, or the rather predictable shortages of contractors every time a hurricane hits Florida. In Florida it's even worse, because contractors there must be licensed in each individual county in which they want to do business.

Since when did contractors ever give a damn about long-term trust? Contractors are the most notoriously dishonest group of people you'll ever meet. Their culture encourages ripping off customers. I have zero confidence that just because one is local I'll be getting a fair, honest workman. Plus they get special legal rules just for them, like the right to lien your house if the general doesn't pay them, forcing you to pay twice for the work and pay even more to litigate against the general contractor. In every other industry I'm familiar with, subs only have causes of action against the general contractor, not the contractor's customer, and they sure can't preemptively lien your property without a judgment. I'm sure such generous extra-judicial powers have no effect on how a contractor treats their customer.

Is it really the case that taking a chance you might get shoddy work is worse than the guarantee that your house won't get fixed for many months because of licensing-caused shortages? You might get to the front of the line with a backroom payment, which I can't recommend because it's probably illegal, but I know for a fact it happens. That greatly enriches the contractor, but is hardly good for the consumer. I would prefer that I, not some bureaucrat, gets to make the decision to take a risk on an out of town contractor.

Justin P

With emerging tech like angieslist.com, I think the case for state licensing get worse, not like it was a rock solid case to begin with.
People now have more power to regulate industry with the power of the checkbook, which is far superior than a regulator.

randian

I've never heard of angieslist.com. Thanks for the link.

danielkuehn

Ummm... the contractor I used to work for had a great reputation in the county because he actually had an interest in maintaining a profitable business.

I'm fine with liberalizing licensing laws, but that's besides the point. If freak occurances cause a rapid jump in demand, there's going to be a shortage of vaccine manufacturers, contractors, or whatever else. And the price mechanism will adjust supply in response to that shortage. None of this is in doubt. The point is that the incentives to be trustworthy that are there in a normally functioning market are usually the result of "repeated games". In a crisis situation there is often no "repeated game", hence no market incentive for the same trustworthiness. The relative trustworthiness of contractors as a class doesn't change this.

surfisto in Chile

Wouldn't the vaccine produced have to go through the FDA. I know Prof Roberts see's no need for the FDA and I agree with his arguements for getting rid of it. However, isn't this one function of the FDA so that we don't need to trust?
I don't want to go into trusting the gov't with this disscussion however relavent.

vikingvista

"isn't this one function of the FDA so that we don't need to trust?"

The purpose of the FDA is so that you can pay more for the privilege of FEELING like you "don't need to trust".

surfisto in Chile

Some people are willing to pay for that "feeling." They might not know that they are paying more for that feeling then they have to if the FDA went away and private firms took over.
I know the incentive for each firm to produce "safe" products would be there in the private system; however, I can't turn my head when you see the same incentive causing the peanut butter deaths here in the USA and the powdered milk deaths in China. In each case it was profit incentive at fault. However, people need to realize it is not evil capitalist doing this, but immoral people which would be present in any system.
At the same time I understand the the FDA makes the process for new drugs much more expensive and time consuming and how many people die because of the process.
I personally don't know where to draw the line. I see the benefits of a private system vs the FDA, but I know that fraud will occur at the expense of deaths.

vikingvista

"I know that fraud will occur at the expense of deaths."

You mistakenly believe the FDA protects you against fraud. I can't account for ideas, however false, that make some people feel good, but other than those ideas, the FDA provides you with NOTHING of value (unless you are employed by them).

Justin P

It's ever and always about the opportunity costs.

We probably won't know how many people die each year waiting on drugs to get approved by the FDA considering where the funding for such a study would come from.

danielkuehn

I'm not sure - I can't imagine they go through the time of a normal FDA approval. Probably an expedited CDC thing.

Either way - markets are obviously the best way to respond to shortages. I just don't think that we can have the same expectations about trust in a crisis that we can in normal circumstances.