“Mother, Do Not Get Sick over the Loss: It Is Only Bushes"

Whoever said education is a two-way street was quite right. I am an educator. I have educated so many. I have advised and counseled students throughout their Ph.D. studies in economics. I have always been on one side of the street – giving rather than receiving. A few days ago I was on the other side of the street, receiving advice and counseling. Let me explain.

Several days ago, a bunch of intoxicated twenty year olds missed their turn and instead plowed the car one of them was driving into my front lawn. The car landed in a densely covered frontage with bushes. The car crash caused the destruction of sixty bushes and the damage was put at something over $20,000. None of the people in the car were hurt.

Aside from a total wreck of a car, the only damage was the death of my lovely “BUSHES”. As in cases such as this, the driver was not insured, so I am left holding the bag. But this loss is not the motivating factor in my writing about the event. The destruction of my personal property, to be sure, was the catalyst that prompted me to write, but what made me rethink the value of the loss was the advice I have received from my daughter. Her statement, “it’s only bushes”, triggered the economist thinking about what determines “VALUE”.

David Ricardo back in the 1800s attributed the value to labor embodied in the good (Principle of Political Economy); hence, this became known as the “labor theory of value”. This clearly aroused a great deal of discussion, not only because of reducing all inputs that went into producing value to a single factor, but because of its neglect of why a good, produced by labor or other factor, would command a value. Alfred Marshall’s “Principle of Economics” (1890) provided an answer which remains in today’s economics textbooks. According to Marshall, “value is wealth”. There are two elements that determine value: value in use and value in exchange. Marshall has also stated (something that many of us seem to have forgotten!) that wealth consists of desirable things or goods. Desirable things are Material, or Personal and Immaterial (p.54). Material goods consist of useful things that satisfy human wants. Nonmaterial goods fall into two classes: one consists of a person’s own qualities and faculties for action and for enjoyment (he calls it internal goods). The second are called “external” goods because they consist of relations beneficial to the person with other people. The question then is, what constitutes a person’s wealth?

According to Marshall, “A man’s wealth is his stock of two classes of goods: those to which he has a property rights” (i.e., my bushes), and “those external immaterial goods”. Marshall goes on to say that we must also include as goods the benefits which one derives from living in a certain place, a certain environment. This is the essence of what has given rise in the economic literature (although not commonly attributed to Marshall) as “environmental amenities” and hence our theories of “hedonic” prices.

In the undergraduate texts of price theory, we often neglect this element of wealth in defining value. In the study of public economics and/or environmental economics, these amenities are captured in determining the valuation of housing and the choice of residence or environmental qualities. Even though these disciplines have developed excellent models for the valuation of said amenities, such as “the willingness to pay”, and “willingness to accept” models, it had struck me that we neither incorporate these amenities in determining the “replacement” costs for property damages or in the valuation of risk to life and limbs.

Take the first case (and the loss of my bushes) as an example. As I have mentioned earlier, it was not the monetary loss alone that made me “SICK”. As Marshall put it so many years ago, the value of a good is much more than that of exchange. Put differently, a man (or a woman, in this case) does not live by bread alone. We live by our environment. The human mind and feelings are quite complex. What triggers happiness, sadness, enlightenment, or sickness cannot be put down simply to the satisfaction of material goods. I am an early riser. A morning walk in my garden triggers happiness and excitement at the sighting of red cardinals, the sole blue jay, and the cotton tail rabbits, and, yes, my lovely bushes. I have lived with these bushes for some thirty years. I have fed them, nurtured them, and protected them from predators – they are part of my environmental amenities, a part of my every day living. Well, they could have died a natural death – old age or disease. I could accept that, but destruction due to reckless behavior of a young man is not acceptable.

Over the past few months, the news media have daily reported the prevalence of this type of destruction to people’s properties. Every other day or so, they report a car or a truck that went into the front lawn of a residence, the front of a convenience store, a restaurant, and so on. The story never goes beyond that. No one ever asks why this going is on, and what kind of penalties such behavior elicits. I got my answer yesterday. According to our local ABC station evening news, drunk drivers in the state have successfully been able to suppress the result of the breath analyzer from the jury in the trial. As a result, they reported a 26% increase in accident caused by drunk drivers and a 23% decline in the conviction rate. The report comes from the Worcester county district attorney’s office.

Thank you, my daughter, for your advice. Rest assured that I shall get over it, but most importantly I shall revisit the study of value. Perhaps we might be able to incorporate the values of these amenities in the insurance contract.

On the Question of Divestiture

“State Moving toward Divestment from Sudan: Bill Would Affect Small Percentage of Pension System”, Worcester Telegram and Gazette, March 14, 2007.

On March 29, 2007, actress Mia Farrow appeared before the Massachusetts State House calling for state divestment from Sudan, citing the atrocities committed by the Sudanese troops against the people of Darfur. What is going on there is nothing short of genocide. The bloody war in the Darfur region has caused over 400,000 war deaths. According to the WT&G report, Massachusetts wants to become the eighth state to enact divestment legislation, part of an over all strategy to stop the Sudanese government’s systematic slaughter of Darfur citizens.

The sentiment behind this legislation is to be applauded. As the saying goes, “every little bit helps”. But will it? Let us look closely at what is being contemplated. Again according to WT&G, State Senator Edward M. Augustus Jr. believes that “Mr. Patrick would sign divestment legislation if it reaches his desk”. That is well and good. The next paragraph states, “The bill would allow the state to opt-out of divestment of a particular company, if it turns out that divestment has a NEGATIVE EFFECT ON INVESTMENT RETURNS”. About two-tenth of one percent of the state’s pension fund is invested in companies that do business in Sudan. Well, I am floored.

There was a time in relation of discussion about the looming federal budget deficits that the phrase “smoke and mirror” was coined. If it is for the show, then the legislation or the talk about the possibility for said legislation appease those, who are genuinely concerned over the plight of the Darfur people and lack the power to act on their own, would find the legislation to be the next best thing—to hit the attacker where it hurts the most, in his pocket book. Be real! Is the loss of two tenths of one percent of the state pension fund assets invested in companies doing business in Sudan going to make a dent in the Sudanese government war chest? Remember, they have the BLACK GOLD – oil. Perhaps, this could be so, if all 50 states were to divest. One can but hope.

Let me now turn to examine a most unpalatable provision in the legislation. As quoted earlier, the legislation would allow the state to opt-out of the divestment if pulling out would have a NEGATIVE IMPACT ON INVESTMENT RETURNS. It does not take economic training to figure out the implication of this provision. Companies diversify their investment portfolio to garner highest returns for their investors. In the business world the “bottom line is king.” Investment companies’ executives live and die by the bottom line. The State when investing its pension fund assets in Sudan expected returns on its assets equal if not higher than what it could have earned from different investments. When the State of Massachusetts made their investment decision, the overriding factor was returns for a given risk. The provision that the state would pull out if returns were to fall due to divestment struck me as naïve at best if not downright “erroneous”. All actions are either motivated by profit or social justice. However comforting it may be to believe that the state divestment would speed up the fall of the Sudanese government, or end the devastating effects of the mass killing in the Darfur region, we need to be honest about not only our motives but also our actions. Governor Patrick, if he were to sign the legislation, would further the cause in striking down the opt-out provision from the bill. Most significantly, perhaps, is to make an honest assessment about whether the state divestment will alter the behavior of the Sudanese ruler.

There are no nobler causes than these of restoring life, liberty, and dignity to oppressed people. We, the residents of Massachusetts, should be the ones to ask, “How may we help?” I for one have more questions than answers. Genocide and mass killing in such a far place should not prevent us from asking the question. Perhaps if many of us did, we may be able to change the political landscape. We may even find some answers.

Call it Free Enterprise

The New York Times, Wednesday March 21, 2007, revealed on its front page what some of us already know (at least those of us who experienced it) the push drug companies make for physicians to sell their patients on the “new improved technology” – “A state’s files put doctors’ ties to drug makers on close view: debating whether payments affect patient care”. Nothing wrong with pushing new technology. What good are advances in technologies if they cannot be put to use to improve the personal and the national health? I am grateful that our society and our educational system generate technologies that protect us against deadly diseases, improve our life expectancy and the quality of our life. Not all societies can boost of what our technology have contributed to our quality of life. Having said that, I would like to address the issue in the article: Do payments to doctors by pharmaceutical companies affect patient care? My initial thought on this question is unqualified yes. One way or the other, patients’ health is affected by whatever the doctor prescribes. This question, I am afraid, is not all that informative. A more enlightened and pointed question is to ask: “Are payments to doctors “adversely” affect the delivery of care?”. A related question, which is much more critical, should be: “Do payments to doctors raise the cost of health care?”.

As an economist, I believe that my second question goes at the heart of societal problem of dealing with the ever rising cost of health care. Health economists have for long advocated the need to address the rising cost of health care associated with overuse of scarce resources, moral hazard and the resources expended through the use of up to date technologies during the last few months of life. Putting the cost issue aside (there are so much written on this), I would like to turn to the basic question raised by The New York Times. If there is a new drug that has been approved for a given illness, why do pharmaceutical companies have to pay doctors to prescribe new drugs that presumably are more beneficial for patients than old drugs? I will focus on rheumatoid arthritis, first because I have a first hand knowledge of what RA is all about, and secondly because the payment to the RA doctor is one of the highest – according to The New York Times, $6,053, which is 6 times as high as for internal medicine and 2 ½ times as high as for cardiologists, and given that these payments are not overt “bribes”, but most often are made to fund physicians’ research, which presumably will impact treatment, why should drug companies or doctors for that matter be apologetic about making or receiving such payments?

There are good uses as well as abuses arising from such practice. When a doctor, influenced by payments prescribes a drug that is more expensive, such as remicade or enbrel (the cost of monthly treatment ranges from $5,000 to $1,000), which for some patients has outcomes similar to a less expensive therapy (say prednisone or NSD such as celebrex), then the doctor like many other in society has an ethical problem. Overuse of drugs by doctors are not uncommon (see John Abramson’s “Overdosed America: The Broken Promise of American Medicine”, 2004) but so is the over demand placed by patients on doctors – whenever a new drug appears in the market. Drug companies saturate the market with advertisement (see ads for enbrel) that induces even the most enlightened among us to ask for it.

There are two salutary features arising out of the financial ties, reported by The New York Times. First of all, it warns us of possible “corruption” in the delivery of medical care; and secondly, it encourages us to be informed not only about our doctors but also about the various drug therapies out there. Knowledge is the most effective instrument the patient should seek. Unfortunately, many do not seek it either because they are intimidated by the “white coat bigger than life image”, or because of the cost of securing information.

The New York Times did their readers a great service, not just by making a “good expose of drug companies practice” but also in making patients (hopefully) aware of their responsibilities in managing their medical care. To make a choice one needs to be informed. Fortunately, today’s technology, the internet, has made the information accessible to all.

Africa development needs development of the mind beyond the University’s border

In two previous notes I have welcomed the education reforms contemplated and/or being currently instituted in Burkina Faso and Ghana. I have argued there and I shall argue here that Africa’s development should not focus solely on improving the “material basket” of goods for the population, but should also address the need for cultivating the most significant source of wealth – the mind. Translating into simple terms, the development of human capital. Building schools to alleviate illiteracy and/or provide vocational training although a prerequisite to a developing society, it is by no means sufficient. What is needed is to address a much more powerful resource, the human mind. Universities are the host for such a development. There is an urgent need to focus on this pillar for development. It is not enough to boost that an African country has one or two universities within its border or that there are thousands of students enrolled in these universities. Rather we should be looking at the university not only as a vehicle to generate a higher level of education, which is salutary, but also as an engine for development.
The African Universities have to serve their clients, the students, but much more importantly the community and the country. As it currently stands, the African University is over burdened by lack of infrastructure and teachers. Most significantly is the lack of the freedom and/or capacity for students and faculty to participate in the development of their community and country.

With all the difficulties associated with Africa’s development, I am encouraged by news from Africa about academia’s reach to the community. In February 2007, students from the University of Nairobi (Kenya) visited four villages in a Matayos division (a hard core poverty area) to carry out community development outreach activities. The theme was: “taking the university to the village”. The underlying philosophy I believe is to develop a model for the university to reach out to the community and to learn from the community. Education is a two ways street. The university generates knowledge, but most African universities insulate themselves from active participation in their communities and most often play no role in shaping or formulating development policies. Knowledge is a “treasured” good but it should never be locked up within the walls of the university.

The Institute for Economic Policy Studies’ African Outreach Program is committed to expand the boundaries of the University by enabling college teachers and students to break new grounds in redefining the role of the university. We believe that the university not only is a generator and store of knowledge but also an active participant in dissemination and the use of this knowledge.

The Institute for Economic Policy Studies (see its activities at http://www.iespolicy.org/) is currently in the planning stage for a Conference on the “Role of the University in the Process of Development”. More on the program will be posted later.

Africa on the move

News from Africa is most often grim. The never ending ethnic conflicts in Darfur, the mass killing in Rwanda, the children soldiers in Somalia, to cite a few, although have a shilling effect on our sense of justice and fairness, their frequency leave one to wonder if ever we will hear of good news coming out of Africa.

The African Executive, a magazine accessible online, has weekly features about development events in Africa. In its February 28th issue, two worthy news items were featured. The first, titled “Freedom: The way forward for Africa”, relays to their readers a very significant message that came out of the 2007 meeting of the Mont Pelerin Society hosted by Inter-Region Economic Network in Nairobi. The Society discourse focused on “The Institutional Framework for Freedom in Africa”. This is indeed good news. In my February 27 piece “Africa open for business: A Minister’s view on the role of African University in economic development”, I have made the point that we need to do more than to articulate the link between democracy or freedom and economic development. People in the developing world need to be shown that democracy is a “prerequisite” to economic development. The Mont Pelerin Society meeting in Nairobi is one such and effort. By facilitating exchange of ideas between African scholars, legislators and policy makers from Africa and other continents, they demonstrated that a prerequisite to understanding the link between freedom, political and economic is for the citizenry to be informed about the practice, the principles and the workings of a free society. Hopefully many more such meetings will advance the cause of freedom and economic progress in Africa.

The second news item is about education reform in Ghana. In my piece I have relayed what Minister Pare, the Minister of Education in Ouagadougou, have said about the need to reform the education system in Burkina Faso by linking the University to a house. The African University, in the words of Minister Pare, “was like a house with a roof which is not adapted to the house. To make the roof fit with the house, changes have to be made to the plans.” There is a reason to be optimistic about educational reform in Africa. The Ghanaian Minister of Education, Papa Owusu Ankomah has introduced a new education bill that link the education system to the economic development of Ghana. As reported in the African Executive under the heading “Rebranding our education system”, the Minister makes the case for “decentralization of education management and development” that “in the education planning and management, the respective Ghanaian communities should be involved in the sustainable development of Ghana.” Minister Papa Owusu Ankomah, like Minister Pare, has voiced the need to reform the education system in their respective countries. What is remarkable about this is that both ministers not only have articulated the link between education and economic development, but outlined steps to bring about changes that advance the cause of Africa’s progress.

Freedom and Education, let us hope will lead the way forward.