He therefore proposes to distribute the vaccines under the supervision of the state using algorithms. This would also prevent hoarding of vaccines. “Coordination has to go even further if the classic price mechanism is suspended in emergencies,” says Ockenfels
At the same time, the renowned economist opposes the growing nationalism in the corona crisis. Cooperation across larger regions would be helpful.
Read the full interview here:
Mr. Ockenfels, are free markets able to direct vital goods to where they are most urgently needed in acute crises such as the corona pandemic?
If the global demand for essential medical goods suddenly rises steeply, the price will also rise steeply. This also creates desirable incentives to expand production quickly. In emergencies, however, there can be ethical and economic reasons to protect end consumers from major price shocks.
The ventilators and protective equipment that a government has obtained on the world markets should not only go to the highest bidder, but to where they can save as many lives as possible. Scarce corona tests should primarily be distributed to hospitals, retirement homes and schools, rather than being sold to financially strong companies.
When developing a vaccine, can the incentive for high profits and the ethical obligation to distribute the vaccine to everyone as quickly as possible be reconciled?
Only if the state intervenes. If the vaccine development were left to the market, too little would be invested and produced due to high development and price risks. Michael Kremer, winner of the 2019 Nobel Prize in Economics, therefore demands that the state guarantee fixed prices for successfully tested vaccines.
A few years ago, such price guarantees led to an estimated 700,000 lives being saved by new pneumococcal vaccines. Similarly, for example, 100 euros could be awarded for each of the first 300 million people vaccinated against Covid-19. Kremer also demands direct grants for the development and production costs of a vaccine.
Which markets already have crisis mechanisms in place and what is the experience like?
Different markets require different crisis management tools. There are Nobel Prize-winning mechanisms that find suitable donor-recipient pairs without prices for as many kidney transplants as possible, algorithms that intervene in the risk of collapse in pricing on financial markets, and mechanisms that replace parts of the electricity market trading in catastrophic weather events with algorithmic optimization.
These and many other examples show that a market is not good per se. Extreme situations often show that markets can be fragile. The regulations then have to be repaired and developed further.
They propose a combination of “Big Data” and Artificial Intelligence for the distribution. Is this still a market economy or is it just an attempt to run the invisible hand of the market by the state?
Algorithms play an essential role in all modern markets. And a coordination point is particularly useful in emergency situations. However, this does not automatically mean that the distribution must be planned centrally. Decentralized trading in electricity and financial markets also requires a central clearing house so that the invisible hand can unfold its magic.
The tasks of the central authority include profane specifications about the opening times of the markets, through to measures that prevent corruption and price fixing, define product standards and trading formats and facilitate price transparency. Coordination has to go even further if the classic price mechanism is suspended in emergencies. Even then, price control and the many advantages of decentralized decisions do not always have to be foregone.
Are you alluding to the “medical currency” for hospitals that you brought into the debate?
Here is an example: seminar places are often scarce at universities. Of course, we cannot simply auction these places to the highest bidders. So some faculties have created an artificial currency and allocated an equal budget in this currency to each student. The students can now use their artificial money to “bid” on the coveted seminars. This creates prices in the artificial currency, which indicate shortages and desires and thus enable a better allocation of seminar places.
There is a similar system for distributing donated food to the food banks in the United States. Each board receives a budget in an artificial currency proportional to the estimated number of people in need in the region. The budget enables each board to communicate their demand and buy groceries.
What is the difference to normal markets?
The difference is that the free, fair and transparent provision of the artificial currency guarantees that the most coveted products don’t just go to the richest tables. An artificial “medical currency” for emergency situations would now analogously allow vital medical goods to be traded between hospitals and thus to be distributed in the best possible way in time and space.
Could this also contain the hoarding of urgently needed health goods?
Yes. Today, essential medical goods that governments buy on the world markets are often distributed on demand. The view of the whole is lost. Institutions that fear that important goods may become scarce have incentives to inflate their demand and to hoard reserves. This can exacerbate bottlenecks elsewhere.
Algorithms play an essential role in all modern markets. And a coordination point is particularly useful in emergency situations.
Coordination through prices would motivate to leave reserves to those who need them more urgently. However, price signals cannot completely rule out excessive hoarding and homemade bottlenecks. We all saw it last on toilet paper.
The pandemic has shown that everyone is next to themselves. How can this nationalism be overcome?
The pandemic strikes in different areas at different times and in different degrees of severity. That is why coordination across larger regions is helpful. In the midst of the hectic pace of a crisis, it is of course difficult to achieve cooperation. But in the future, when nobody knows exactly where the first vaccine will be developed, there are definitely incentives to spread the risks over many shoulders. However, some of the tools we proposed would also help at the country level. It would be good if we were better prepared for the next wave.
Mr. Ockenfels, thank you very much for the interview.
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