A Fruity Response

23 May 2006 at 2:03 pm 1 comment

| Peter Klein |

Much of the resistance to markets and “market-like” mechanisms within firms seems to flow from a belief that market exchange is somehow crass, profane, and uninspiring, at least compared to communal or family relationships. An example is the horrified reaction of many bioethicists to economists’ proposals to allow markets for cadaveric organs, particularly kidneys.

I’ve avoided commenting on the organ-market controversy, though I’ve been using it as an example in my introductory courses for years. I have little to add to the excellent discussions by Kaserman and Barnett, Epstein, Mankiw, Becker, etc. (not to mention this observation from Robin Hanson). But I can’t resist pointing to a letter in today’s Wall Street Journal by one Charles Fruit, chairman of the National Kidney Foundation. Responding to Richard Epstein’s earlier op-ed in favor of markets, Mr. Fruit declares himself “among the millions of other ‘high-minded moralists’ who oppose treating life-saving organs as commodities.” Closing his letter with a presumed coup-de-grâce, Fruit adds: “We moralists can only pray that [Epstein's] proposed market mechanism for the transaction of hearts, lungs, kidneys and other life-saving human organs would work a little better than it does for the nation’s consumers of gasoline.”

Cute. But how exactly should gasoline be allocated to consumers? Gasoline producers should donate supplies of fuel to consumers out of, um, love? A sense of community responsibility? Altruism? The federal government should allocate gasoline, Soviet-style? I await Mr. Fruit’s proposal.

Seriously, like Mr. Fruit’s argument, much of the management literature critical of markets seems to suffer from a lack of attention to comparative institutional analysis. Of course, markets are imperfect. So are hierarchies and hybrids. So, too, I suspect, are loving, communal, family-oriented firms.

Update: Division of Labor gives us this great moment in non-market allocation.

Entry filed under: - Klein -, Classical Liberalism, Institutions, Management Theory. Tags: .

“The Train Wreck That Is Strategy” and Game Theory Non-Market Motivators

1 Comment Add your own

  • 1. Bo Nielsen  |  24 May 2006 at 11:14 am

    Interesting – yet I suspect that what the (Democrats?) are looking for is more in line with what Europe and other parts of the world have managed through public policies.

    Europe, for example, spends about half of what the United States does on energy, relative to GDP. But Europe has entirely different policies on everything from mass transit to building codes to gas taxes. Brazil makes more than half of its motor fuels from domestic renewable ethanol. Japan is far ahead of the United States in the development of efficient hybrid cars.

    Democrats’ ideas include the proposal by Senator Robert Menendez of New Jersey to suspend temporarily the (industrial world’s lowest) federal gas tax of 18.4 cents a gallon to be offset by an excess-profits tax on oil companies, a federal investigation of price gouging, and demands that Bush ”jawbone” his chums at the oil companies and in Saudi Arabia and Kuwait. Senator Ron Wyden of Oregon wants oil companies to start paying long-avoided royalties for petroleum drilled on federal lands.

    Meanwhile, the oil industry is having a difficult time explaining how oil profits as a percent of sales are modest while their profits relative to invested capital are off the charts. Perfect market? ExxonMobil just released its first-quarter profits: more than $8 billion — its highest ever. ExxonMobil CEO Lee R. Raymond, who recently retired, was paid $400 million last year. Executive compensation is a topic for another entry, however, Mr. Raymond could probably fund the entire gasoline consumption of a small-mid-size American city – I doubt that he will?

    Finally, I find the concept of altruism extremely interesting and somewhat undertheorized in the management literature. We argue for opportunism and rational choice but altruism (although I would argue it does not exist in its purest form) seems worthwhile exploring as a construct in management decision-making as well. Anyone know of any studies using this type of construct?

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