Friday, October 25, 2002

The limits to economics.

On Life Matters with Geraldine Doogue last week I discussed what the Bali tragedy and others like it tell us about the limits to economics and pricing.

After September 11 last year Allianz Insurance specifically excluded from its travel insurance policies cover for consequences of acts of terrorism.

Yet as soon as an act of terrorism took place that exactly fitted the criteria for exclusion, Allianz waived the exclusion.

Many Australian travelers to Bali chose not to take out travel insurance, knowing that their cost of travel back home would not be covered if something went wrong.

And yet within hours of the Bali tragedy the Australian government said it would help out anyone who wasn't insured.

Which might make you wonder whether there is any point in treating the wording on insurance policies seriously...

I am told (perhaps unreliably) that the first-class tickets for passengers on the Titanic entitled them to guaranteed access to lifeboats. Not so for the third-class tickets.

And yet when tragedy struck the clearly-defined rules fell apart.

Tragedy shows up the limits to economics and pricing.

As do religious matters. In 1990 Clive Hamilton headed research at the Resource Assessment Commission. He attempted to put a financial value on the worth of preserving Coronation Hill at Kakadu. He used to ascertain how much money Australians would be prepared to pay to have Coronation Hill not mined. He told me later that he lost his faith in such surveys when he asked himself how it would sound if he asked the same questions to an aboriginal people with spiritual ties to the land. Even to ask the questions would be offensive, and would degrade the religious attachment it was attempting to measure.

That's the concept I dealt with on Life Matters, quoting from a paper entitled Taboo Tradeoffs: Reactions to Transactions that Transgress the Spheres of Justice.

The Abstract says:

"Taboo trade-offs violate deeply held normative intuitions about the integrity, even sanctity, of certain relationships and the moral-political values underlying those relationships. For instance, if asked to estimate the monetary worth of one's children, of one's loyalty to one's country, or of acts of friendship, people find the questions more than merely confusing or cognitively intractable: they find such questions themselves morally offensive."

God, life and death, and love appear to be among the entities that pricing is not only bad at handling, but to which it can do enormous damage.

The authors Fiske and Tetlock attempt to explain why this is, and suggest ways how, in the absence of prices, we can rationally make the tradeoffs that we have to between say, mining and god, or prices and life.

I agree with them that prices are useless and actually cause damage in many circumstances, I think their explanations of why this should be the case are reasonable, but I find their suggested solution unsatisfying. Having said that, I can't think of a solution at all. How can you trade off apples and oranges if you can't use prices?

Worth a read.