What Economics Can Teach Us about Ebola

October 31st, 2014 by Leave a Comment

By John C. Goodman

John C. Goodman
John C. Goodman

There are two fundamentally different ways of thinking about complex social systems: the economic approach and the engineering approach. The thinking about Ebola at the Centers for Disease Control and Prevention (CDC) reflects the engineering approach. The behavior of everyone else reflects the economic approach.

Social engineers see society as disorganized, unplanned and inefficient. The solution? Let experts take over. Social engineers inevitably believe that a plan can work even though everyone who is expected to carry it out has a self-interest in defeating it. Implicitly they assume that incentives don’t matter. Or if they do matter, they don’t matter very much.

Economics is the science of incentives. Almost everything interesting that economists study flows from the fact that people respond to incentives. Complex social systems display unpredictable spontaneous order, with all kinds of unintended consequences of purposeful action. In a good incentive system, however, people find that when they pursue their own interests, they are also meeting the needs of others. Perverse incentives, by contrast, almost always lead to perverse outcomes.

Thomas R. Frieden, director of the CDC, exemplifies the engineering approach. From the beginning of the Ebola scare, Frieden assured us that Ebola was unlikely to get to the United States in the first place; and even if it did, we know how to isolate the victims and keep them away from everyone else. What all this calming rhetoric overlooked was how many people have a direct self-interest in undermining what Frieden described.

By the way, most people in health policy take the engineering approach. That is why there have been so many mistakes and so many failures of policy – ranging from Obamacare to Ebola control.

Ebola virus
Ebola virus

Self-interest. People tend to put their own interests first. In doing so they will compare costs against benefits. The World Health Organization (WHO) is predicting that in two months there will be 10,000 Ebola cases per week in West Africa. If so, lots of people there will try to come to the United States. The average West African can’t afford the price of plane ticket (a little under $1,500); but many can. They will come because they are infected (and have no chance of survival in their own countries) or because they think they might be infected or because they simply want to escape a dangerous part of the world.

If we want to stem the flow, we can raise the cost of traveling here and/or increase the benefits of staying put. We can raise the cost of travel by imposing high fees on travelers from the affected areas (to reflect the risk they bring with them), imposing travel bans to one degree or another, subjecting travelers to expensive and time consuming screening and threatening to return those who arrive with the infection back to their home countries. We can increase the benefits of staying home by sending more aid to the afflicted areas.

I’m not recommending any of this. These are just some options.

Self-interest explains the actions of almost everybody in the long list of regrettable errors that have recently occurred.

  • Thomas Eric Duncan, the Liberian national who brought Ebola to the United States, was acting in his self-interest. If he lied to get here, that’s because lying was in his self-interest.
  • The hospital that treated Duncan was acting in its self-interest. It was ill-prepared for the case, but that is understandable. Why would a hospital in Dallas invest a lot of resources in quarantine control if the odds of needing those skills is quite small?
  • Hospitals are also rarely penalized when they make mistakes.
  • The nurses who became infected were acting in their self-interest. The one who flew to Dallas on an airplane was significantly disregarding the risk to other passengers in order to get home.

Externalities. As the term implies, people’s actions can affect other people in ways that are external to the market. Duncan entered a contract with an airline. But his actions had consequences for others that were external to the market for airline tickets. Ebola is classic case of an externality. People through their own actions are imposing huge costs on others or putting others at significant risk.

Market Failure. Externalities are said to be an example of market failure. They are problems that markets do not solve (or do not solve in the near term) because it’s not in anyone’s self-interest to solve them.

Government Failure. Ordinarily it is thought that government should step in and take care of externalities. But if the problem persists, it is likely a reflection of government failure.

This occurs when the political system doesn’t make it in anyone’s political self-interest to solve the problem. For example, it turns out that the Dallas hospital had an Ebola detection kit that can detect Ebola with 90 percent accuracy in less than an hour. It’s a kit that is being used by the U.S. military right now in West Africa. In principle, when Thomas Duncan entered the emergency room, hospital personnel could have tested him right on the spot. The problem: that would have been illegal! The Food and Drug Administration (FDA) has approved the kit only for research, not for treating routine patients.

We generally think that the pursuit of self-interest in a market makes everyone better off. With an externality, the infected person’s pursuit of apparent self-interest is very bad for everyone else.

How could the incentives be different? We could consider penalties for people who unreasonably put others at risk (even if there is no eventual harm). And we could consider rewarding those who (at significant cost to themselves) avoid putting others at risk.

There is a long literature on why the FDA is overly cautious – preventing patients from gaining access to life saving therapies that I won’t review here. See the movie Dallas Buyers Club and check out examples that affect children at http://onforb.es/10CCo9H.

This commentary, by John C. Goodman, a Senior Fellow at the Independent Institute, first appeared in Forbes.com and was reprinted by the the Independent Institute. 

 

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