Vaccines and the Knowledge Problem

 Below is an excerpt from the blog Marginal Revolution:

"Northam’s health department has also forbidden people from crossing county lines to get the vaccine. If the county next to you has an abundance of the vaccine, you can’t get it. Only residents of that county may get their vaccine.These new rules will result in many people either having their vaccination appointment canceled or delayed for months." 

https://marginalrevolution.com/marginalrevolution/2021/01/our-virginia-regulatory-state-is-failing-us.html 

Vaccination clearly represents a public good and arguably falls within one of the legitimate roles of government. That means socially planned vaccine distribution. Chic-fil-A knows how to distribute chicken sandwiches efficiently through their drive through during a once in a hundred year pandemic, but government bureaucrats do not (and fundamentally can not! ) know how to distribute vaccines during a once in a hundred year pandemic.

Socially planned vaccination will demonstrate all of the key characteristics of social planning and socially planned economies: delays, shortages, excess, waste, abuse, arbitrary rules etc. This is NOT a partisan anti-government rant, or even a subjective personal point of view. It is an objective quality of bureaucratic decision making that no economist can deny. It's as much the nature of social planning as it is the nature of dogs to bark.

Socialism Can't Calculate

At the root of these unfortunate consequences is what economist Frederick Hayek characterized as the knowledge problem. Governments allocate resources in a fundamentally different way than individuals do in through the price system. The result is a well coordinated spontaneous order guided by prices that reflect tradeoffs based on the knowledge and preferences of millions of individual decision makers. Governments (via democratic processes and social planning) allocate resources based on the limited knowledge and preferences of a few voters, elected officials, or appointed bureaucrats. The fundamental problem facing all forms of government including democracies is that centralized decision makers never have enough information or proper incentives to act on the information at hand. That's the knowledge problem. Its not just a problem for governments, its also one of the biggest challenges faced by firms too.

Socially planned economies could never achieve the level of knowledge coordination required to give us things we take for granted today like smart phones:

   

 Or even something as simple and basic as pencils:

   

So What is the Answer? Federalism.

The fact remains that vaccination is still a public good and falls squarely and solidly within the scope of government decision making. Operation Warp Speed is a great example of how the national government can achieve some success in this space. By incentivizing production and largely getting out of the way from a regulatory perspective the national government was actually able to facilitate ways for private firms to step in and solve the knowledge problem related to vaccine discovery and production. These kinds of public private partnerships are a model for at least reducing the information loss associated with social planning writ large.

So we are forced into a socially planned vaccination effort. The good news, in the United States at least, instead of putting everything at risk with a single national plan, we get 50 chances to get it right, one in each state. While no one state will be able to necessarily avoid the knowledge problem, some may do better than others and we can learn from successes and failures getting closer to an approximation of the feedback mechanisms provided by the price system. This is one of the strongest arguments for our constitutional republic and federalism that our founders envisioned. 

By flirting with the nirvana fallacy and we might claim that a single national plan would be better than 50 different inconsistent plans - especially if some states prove incompetent. While we might argue that one set of planners (or administration) at the national level could get better results than another (enter political partisanship) that doesn't change the fundamental nature of the knowledge problem. Maybe there are economies of scale that the national government can realize, or maybe it has access to better resources or leadership with more expertise. Would these gains make up for what is lost in the local knowledge that states and counties have that the federal government could never grasp? Devolve as much decision making as possible to the most local level possible. Cooperation between national government, private enterprise, and local initiatives is probably the better answer. In fact, the current approach of the federal government incentivizing the development and purchasing a large supply of vaccines while allowing the states to distribute according to their own plans is consistent with this federalist approach.

Diversification is our best hedge against the the many risks of socially planned decision making. And it's probably the greatest reason our system of government has been able to tolerate a mixed economy as well as it has the last 50 years or so. 

Milton Friedman said: 

"the ballot box produces conformity without unanimity, the marketplace produces unanimity without conformity."

Our experience with a socially planned vaccination effort should provide teachable moments we can point back to in the future when politicians propose planning other aspects of our economy that aren't necessarily national emergencies or public goods. We don't want to introduce unnecessary fragility into our lives by creating unnecessary dependencies on plans whose relative failure or success has to rely on who's in charge. 

Note: In no way should any point above be used as an argument to undermine the effort to vaccinate the public at large.  This is not intended to be a criticism of the current vaccine effort or government. In fact the current approach is largely consistent with the ideals of federalism discussed above. This essay is meant to be totally descriptive and comparative. Getting to 70% + herd immunity is vital to fighting the pandemic. It's a huge public good and every effort by state, federal, and local government agencies and private institutions and individuals deserve great applause. We cannot expect to hold the performance of socially planned efforts against the standards of the price system in terms of their relative ability to solve the knowledge problem. The above is not an attempt to do so, but to illustrate the fundamental differences in resource allocation under a system of social planning compared to the price system. The distribution of vaccines provides a palpable illustration. Neither should this in any way imply that government employees and bureaucrats are incompetent. Everyone responds to incentives. The issue is incentive alignment.

Reference:

The Use of Knowledge in Society. F.A. Hayek. The American Economic Review Vol 35 No 4 (Sept 1945) p. 519-530

More about markets and the knowledge problem:

Models and Assumptions: Efficient Markets, Imperfect Information, Rationality, and Prices 

Economics, Evidence, and High Causal Density

 

 Related:

The use of knowledge in disaster relief: http://www.independent.org/publications/tir/article.asp?a=628

The Government's Response to Hurricane Katrina- A Public Choice Analysis: http://www.peterleeson.com/hurricane_katrina.pdf

Does the Median Voter Theorem Hold Up in the Current Political Climate?

If anything, divisiveness and polarization would describe recent politics (2016-2020). This has made me question my understanding of what's known in public choice as the median voter theorem (MVT). In a post a few years back I wrote the following about the MVT:

"....the median point of the preference distribution will elicit the most votes. Only those laws or candidates with a centrist twist will get the majority of the votes. Only those voters with centrist views will be happy, and it makes it very difficult for candidates to be elected if they want to bring about major reforms. This phenomenon is referred to as the ‘median voter theorem."

Similarly, in his primer article on public choice theory, Pierre Lemieux describes the MVT:

"a simple majority vote will be the ideal (or most favored) alternative that is at the median point of the preference distribution....This explains why, especially in two-party systems, political platforms are so similar"

This was probably my first reading about the MVT, and given the politics of the early 2000s it made sense and led me to believe American politics would most always produce 'moderate' candidates. Others seem to have made similar interpretations about the MVT producing moderates as winners of elections. Economist David Henderson writes in 2017:

"If the Democrats go far to the left of the median voter, what’s the Republicans’ best response if their goal is to win? It’s to go further left themselves"

Economist Tyler Cowen writes in the NYT a few years earlier in 2010:

"Any politician who strays too far from voters at the philosophical center will soon be out of office....In fact, there is a dynamic that pushes politicians to embrace the preferences of the typical or “median” voter, who sits squarely in the middle of public opinion. A significant move to either the left or the right would open the door for a rival to take a more moderate stance, win the next election and change the agenda."

In 2011 when I wrote my post, this all made sense. But recent events leave me with a number of questions about the MVT. Can the MVT explain political candidates as different as Donald Trump and Bernie Sanders? Or even Joe Biden for that matter? How different are voter preferences from the preferences of citizens in general? Are preference distributions bimodal? Maybe within each party the MVT holds but it breaks down at a national level if distributions are bimodal? 

In his piece, Tyler Cowen definitely helps remind us that the MVT has its limitations, and maybe recent politics are testing those limitations:

"Of course, the median voter theorem is far from a complete explanation of politics. Sometimes politicians lead public opinion and talk voters into accepting new ideas, as when President Bill Clinton promoted Nafta. And voters often favor conflicting or contradictory policies, like wanting to pull troops out of Iraq but also not wanting Iraq to explode into chaos."

I have not taken any deep dives in the recent literature, but I found a very insightful post on the London School of Economics blog post written by Richard Bronk. It seems to get to some of the questions I have had recently.

Why have moderate candidates been losing support (and elections)?

"When the financialised version of global capitalism enabled by this consensus ended in the financial crash of 2008 and long years of rising inequality and insecurity, voters were primed to look for radical alternatives to the status quo. Parties pursuing a median-voter strategy – along with the main institutions of the state and most market participants – were locked into what Wade Jacoby and I have called an ‘analytical monoculture’ that left them blind to problems that are not articulated in the language of standard economics and risk management."

How or why might the median voter strategy have failed?

"Only when all elements of the political centre had failed to address their concerns did electors risk voting for ‘anti-system’ alternatives"...[the MVT] assumed that political preferences could be placed on a single continuum (and that disparate underlying values could be converted to a single scale), so that governments could satisfy the preferences of a simple majority of the people and calculate the optimum set of policy trade-offs....[the MVT] underestimated how contested and unstable are the trade-offs between different goals – such as freedom and security, efficiency and equality, medical health and economic growth. There is no one right and rational set of trade-offs for an individual or society"

Is all lost in American (and global) politics? Not necessarily. We could see a return to moderation:

"it may follow that, as anti-system (and often populist) governments are in turn seen to flounder in their management of crises, anti-incumbency may work against the new players themselves.....Voters have noticed that what works to win electoral campaigns does not necessarily solve practical policy problems..."

If any economist might have ideas about how to handle social dilemmas, it would be Elinor Ostrom:

"crisis fatigue may cause voters to shun grand solutions with unknowable consequences and prefer the sort of incremental reform traditionally associated with moderate political parties of left and right. Uncertainty may also increase the voter appeal of the decentralised and ‘polycentric’ approach that Elinor Ostrom argued has the best chance of tackling urgent shared problems – by encouraging diverse experiments in living that engage and involve ordinary voters."

Additional References:

While they do not discuss the median voter theorem, David Beckworth discusses the possibilities of federalism for healing the nations divisive politics with David French: https://macromusings.libsyn.com/david-french-on-political-polarization-in-america-and-its-impact-on-the-2020-elections

Externalities, Coase, Ostrom & Demsetz http://economicsprinciplesandapplications.blogspot.com/2013/03/externalities-coase-ostrom-demsetz.html 

Public Choice Theory. http://economicsprinciplesandapplications.blogspot.com/2011/05/public-choice-theory.html 

Lemieux, Pierre, The Public Choice Revolution. Available at SSRN: https://ssrn.com/abstract=604046