Stephen Monrad

This post follows on my last two posts. You should start with my post on September 27th.

It seems clear that the best outcome is for everyone who needs it to get the cure. The remaining question is who should benefit. At one extreme, everyone who is cured could be forced to live at subsistence level handing any surplus income over to the inventor of the cure. The other extreme would be for patients to pay nothing.

I don’t think there is any clean answer for how to divide up the benefit. The inventor can claim that the invention is his and others have no right to it. He should be able to extract as much money as he can from selling it.

The patients could argue that it is just bad luck that they got sick. They could argue that it costs the inventor nothing to give them the cure. It is unjust to make them pay large sums unnecessarily.

The mainstream economics approach of letting the market set the price so markets clear doesn’t work in this situation. The inventor has a monopoly. Competition is not present.

There is no objective or rational answer.

The likely real-world outcome would be that the inventor would become very wealthy, but would not manage to extract the whole value of the cure. How much the inventor extracts will depend on the legal system in place and the tolerance of people to put up with a high price for the cure.

My feeling is that the price should be kept low and the inventor should only be modestly compensated. The inventor should have compassion for others and not take excessive advantage of his good luck.

This is a follow-up on yesterday’s post about a hypothetical miracle cure for cancer.

If the hypothesized cure is practically free to produce, denying sick people the cure doesn’t benefit anyone. The sick person dies. The inventor doesn’t avoid any effort. The world would be unambiguously a better place if the sick person were given the cure.

The question of how many cancer patients should be cured is trivial. They should all be cured.

The real question is how to divide up the benefit of the cure between those who are cured and the inventor.

Any fixed price is a problem because there will always be some people who need the cure but can’t afford the fixed price. The best solution would be to have a price that varies depending on people’s ability to pay. While a system like this would be difficult or impossible to administer, it is theoretically interesting.

What if cancer patients were expected to pay a fixed fraction of their future income as payment for the cure? If this was still too onerous on the poor, the fraction could increase as total income increases.  This system would ensure that the cure is affordable for everyone.

If the inventor is greedy, he could still earn billions of dollars by setting a high fraction for middle and high income patients.

A fraction of income system like this makes more sense to me than a fixed price. There is, though, still the problem of how high to set the fraction.

Suppose you have a flash of insight and discover a way to cure cancer. This idea pops into your head out of nowhere with little or no effort on your part.

To make this simple, let’s assume that your cure uses common food stuffs so you don’t have to go through a protracted drug approval process. As a hypothetical example, let’s assume that you can cure cancer by drinking a mixture of grapefruit and mango juice. To further simplify the process, let’s assume that the cure is 100 per cent effective so that there is no need for trials or fancy statistical analysis. The success of the cure is overwhelmingly obvious.

The benefit you would bring to humanity would be enormous. What should you be paid for your new cure?

I’m going to assume for now that we want to pay you based on the value of what you have produced. The effort was essentially zero so there is no need to think about it at all.

If there was somehow a way to prevent people from copying your simple cure without paying you using a patent of some sort, we could use markets to determine what your cure is worth.

The next best option for many cancer patients would be death so their willingness to pay is going to be quite high. It would be reasonable to expect to be able to charge every patient you cure several thousand dollars. Since there are millions of cancer patients, you could expect to earn many billions of dollars from your cure through the market mechanism.

Is it reasonable to set a price of, say $5,000 per cured person? The people who are cured would definitely receive $5,000 worth of benefit. For a few month’s salary in rich countries, people would avoid a slow and painful death.

There is a possibility that if people are provided with a way to live above the poverty line without working, they won’t work.  They might choose to take the path of least resistance through life sitting on their butts watching daytime TV.

If this turns out to be the case, the idea of providing a decent minimum income would be unworkable. It may not be possible to raise people above the poverty line with handouts.

Instead, ways would need to be found to make sure that everyone can find a regular job. Ultimately, it is probably better to provide people with jobs than with handouts.

This makes me think of the English proverb “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” What people really need is the ability to meet their own needs.

The role of the economy is to connect the things people need to actions they can take today, right now.

To fight poverty effectively, we need to understand why people choose not to work despite the consequences. There are 4 main reasons I can think of why people choose not to work.

1. Unable to do useful work.

Some people are so sick or have disabilities that make it impossible for them to be productive. If you can’t get out of bed, you are going to have trouble doing anything that someone else will be willing to pay for.

People who are very sick or incapacitated shouldn’t have to work. A compassionate society would happily tend to the needs of these people.

2. Available jobs pay too little.

While living in poverty is unpleasant, it is possible to scrounge up enough to get by. There are charities that provide food and shelter to poor people. You can try your hand at begging. For working to make sense, the pay needs to be high enough to significantly raise your income.

I don’t think it is realistic to expect people to work full time jobs that do not pay enough to keep them above the poverty line.

3. Work requirements are too onerous.

Some people are fragile for one reason or another. They could have a chronic illness that limits how much they can work. They may have a mental illness that makes working in some structured environments difficult. These people can do useful work if the conditions are right.

What these people need is flexibility. Every effort should be made to create opportunities for fragile people to work. Working helps connect people to their community and give them a sense of purpose.

4. Can’t find a job.

Finally, if finding work is difficult, people who would be happy to work might choose not to because they can’t deal with the job search process. In tough economic times, finding a job can be much harder than working.

Somehow the process of matching people to jobs needs to be made more humane. It’s hard not to take rejection by an employer personally. It’s hard to cope with the reality that it can take months or even years to find a job. I think one of the main jobs for economists is to find a better way to match people to jobs.

My belief is that laziness is NOT a reason why people choose not to work. I think we label people who don’t work as lazy when the reasons they don’t work fall into one of the categories discussed above.

The idea of a guaranteed minimum income would be to pay everyone a base yearly amount from the tax base. For the guaranteed income to be effective, it would have to keep people above the poverty rate. If it didn’t, it wouldn’t protect people from the misery poverty brings.

Unfortunately, if people could live comfortably without working, many people would probably choose not to work. Since even a poverty level existence requires significant resources, the burden of supporting those who choose not to work would quickly overwhelm the tax system.

Until the day that robots can do all the work that is needed to keep the economy running, people need to work. Only a small fraction of the population can be carried by those who work.

Instead of guaranteeing people an income without requiring them to work, I think the answer is to guarantee people jobs. If jobs can be provided to everyone who is able to work, the society would only be obligated to support those who are truly unable to work, the sick and infirm. The solution to poverty is to find a way to make jobs plentiful.

It’s hard to create jobs in a market economy, for sure. However, I think it is the only sustainable solution to the problem of poverty.

Most full time jobs are about 2,000 hours a year. Yesterday’s post showed that a single person living in a large city in Canada needed $20,778 a year. That’s over $10 per hour ($10/hour * 2,000 hours/year = $20,000 per year). Next year Ontario plans to increase it’s minimum wage to $10.25 per hour (from $9.50). That’s just enough to keep a single person above the poverty line so long as they work full time hours.

A family of 4 needs $38,610 per year. Nearly two full time incomes at the new minimum wage are needed to stay out of poverty. With the new minimum wage rates in Ontario, families have a chance to stay out of poverty. Both parents have to find steady full time jobs.

Welfare benefits are well below the poverty line. The Ontario Government website doesn’t give a figure because they claim the calculations are complicated. From what I could glean, a single person would end up with significantly less than $10,000 per year, less than half of the poverty line in big cities.

I don’t know if the Low Income Cut-off is the right measure of poverty. What is clear, though, is that poor people need more money.

Statistics Canada has a Low Income Cut Off (LICO) where people spend 20 per cent more of their income on food, shelter and clothing than average families do. There are technical details about tax and data sources, but the idea is simply that if too high of a proportion of your income is being spent on necessities, it becomes difficult to cope with adversity or to participate in community activities.

The numbers for 2005 are:

Source: Statistics Canada. Income Research Paper Series, Low Income Cut-offs for 2006 and Low Income Measures for 2005. Statistics Canada Catalogue no. 75F0002MIE, no. 004.

For reference, the average income for families with 2 or more people in Canada in 2005 was $67,500.

Is being above the LICO cut-off enough for people to live on? You would have to be pretty careful with your money, but you could get by. If all families could be kept above the LICO cut-off, though, I would be satisfied that people’s basic needs were being met.

I could accept an economic system where everyone lives above the economic poverty line defined by the United Nations.

“Fundamentally, poverty is a denial of choices and opportunities, a
violation of human dignity. It means lack of basic capacity to participate
effectively in society. It means not having enough to feed and cloth a
family, not having a school or clinic to go to, not having the land on which
to grow one’s food or a job to earn one’s living, not having access to
credit. It means insecurity, powerlessness and exclusion of individuals,
households and communities. It means susceptibility to violence, and it
often implies living on marginal or fragile environments, without access to
clean water or sanitation”

While this definition doesn’t give dollar figures for poverty, I like the concepts it uses. The idea is that people need not only to be able to meet their basic needs. They need to be able to participate meaningfully in their communities. Poverty isn’t so much about how much you have in absolute terms. It is more about how you can function in your society.

Now that I am focused on what is happening to the bottom end of the income spectrum, a lower bound for what is acceptable needs to be found.

I don’t think there is much to be learned from by looking at the current minimum wages in different places. Minimum wages are set partly with an eye on how they affect unemployment and the competitiveness of different economies. My hope is to address the problem of unemployment directly so that issues of income distribution can be addressed separately.

I don’t think there is any purely objective measure of what an adequate minimum wage should be. I couldn’t think of any moral grounds for arguing that everyone should earn equal wages. I can’t think of any moral grounds for establishing a minimum wage either.

I don’t think a pragmatic approach helps either. I think it would be too difficult to translate an objective like reducing crime into a minimum wage level. There would be the analytical problem of establishing the connection between crime and the minimum wage level and the problem of determining what an acceptable level of crime is.

I think the best approach is to think in terms of long-term sustainability. How much do people need to earn so that they can live without relying on charity and have a decent chance of raising happy healthy children?