Wednesday, September 28, 2022

Real world economics: COVID gives economic lessons

If you understand some of the principles of economics, you can see such principles at play every day in your personal life. I have told Micro Icon classes for 40 years. And that was certainly true in the last two weeks as we contracted and recovered from COVID-19.

edward loterman
edward loterman

Such a simple principle is “change in demand.” Demand is a price-quantity relationship – how many units of each item will consumers buy over a wide range of prices? At any given time, if producers raise prices, they will sell less and if they lower prices they will sell more.

A “change in demand” theory is different. It notes that as relevant circumstances change, consumers will buy larger or smaller quantities in each price range than before. A producer may keep prices constant, but will sell more units if demand “shifts to the right” and less if “shifts to the left”. The words “shift,” “right” and “left” refer to movements fed by a supply-demand diagram force to every Icon student.

In the real world, COVID shifted the demand for masks to the right – people wanted to buy many more masks at every possible cost. Over time, supply also shifted to the right, as production ramped up in response to demand. But for months at the start of the pandemic, we were in a markedly odd situation where manufacturers could charge more and still sell more masks. This is an example in economics when there is a “gap” in dynamic markets, supply and demand often cannot move immediately.

Yet supplies may eventually shift. At first, drugs that reduce the effects of COVID, such as remdesivir, were scarce. But now, 27 months in, nearby pharmacies had ready supplies of the healing drug Paxlovid within hours of positive tests called our doctors.

As the market adjusts, prices can drop for a variety of reasons. One is “the fall in average fixed cost.” The largest component of the cost of almost any prescription (non-OTC) drug is research and development as well as obtaining regulatory approval. These are “fixed costs” – which are the same whether someone sells 1,000 doses or 1 billion doses. Dividing the lump sum amount by one thousand can result in a large amount. Divide that by a billion and it’s trivial. The “average fixed cost” per unit falls, and so do, presumably, prices.

Understand that this is different from the often misused term “economy of scale.” It refers to the situation where per-unit “average variable costs”, such as raw materials, labor and so on, used in actual production, decrease as the size of the factory increases. As pharmaceutical companies switched to producing COVID-related vaccines and drugs from other product lines, they experienced economies of scale.

Huge amounts of money – some government, some corporate – went to crash research programs to develop vaccines and antiviral drugs. It is an example of “inspired innovation”, an idea discovered by the University of Minnesota applied to Icon Professor Vernon Rutan, who used it to explain innovations in agricultural technology in poor countries. Still less appreciated, the inspired innovation is a refined theory of how the squeaky wheel gets grease.

Japanese pilots who crashed into Allied ships during World War II inspired innovation in “solid state electronics”, a miniature radar in a coke-can-sized anti-aircraft shell fuse, required for the proximity fuse. This led to the transistors and integrated, printed circuits we use in our phones, computers and cars today.

The need for effective vaccines has also led to advances in our basic understanding of the coronavirus. These are a big part of the reason my wife and I have come through COVID so well. But the basic science involved goes beyond this specific virus. It will control other viruses and advance further understanding of the fundamental biochemistry of cells. For example, mRNA technology is a huge leap forward in itself.

There is also a macro-icon issue in all of this. Gross domestic product, a measure of the dollar value of the output of “final goods” over a specific time period, is a leading indicator, even though often overused and misunderstood. But the dollar value of a commodity, or the amount produced, can be a poor indicator of the degree to which something actually makes people better.

My father, 51, had a heart attack on February 12, 1950, when I was 10 weeks old. Dr. Van Solkema came home, told that my father was having a heart attack and to rest until he returned in the morning for a check-up. By then my father had died. Today, EMTs would have got my dad downtown in minutes and a stent or two would have been put in within hours. My dad would have been home in a few days and back in a week as general-foreman of the chair factory.

As a sole measure of this situation, GDP will see an ER visit at the cost of only two doctor visits in 1950 and stent insertion in 2022 and show an increase in the value of output. But that dollar figure would undermine the relative value of a child to society growing up with or without a father and perhaps about 30 years of work and community contribution by a very capable individual. Ironically, as stent and catheter-based repairs of heart valves replaced many open-heart surgeries, GDP fell as new, more effective and less-invasive procedures cost less than open-heart procedures. Ergo, less “value added” to society in monetary terms, but much more in human terms.

In the 1918–1920 “Spanish flu” pandemic, my grandmother died, leaving seven children under the age of 20 in the house smoked by burning sulfur. The extent to which the cost exceeds the cost of sulfur for an immunization and her grandson plus five days of PaxLovid for her grandson is a tabular increase in GDP over a century.

Such “dollar value” under the presumption of true benefits to society is not limited to health. In 1963, when our mechanic, Joe, reported to other coffee drinkers that the factory tire Volkswagen the Lautermann had driven more than 21,000 miles to take the kids to school, it was the talk of the Leader Café. A new Galaxy 500 can fetch 16,000.

My first printer, the nine-pin Epson, was $400 in 1986. Replaced the $400 Canon copy-scan-print combo we recently bought at the George W. Bush administration with a half-larger, more-capable one that cost $270. GDP fell even before adjusting for inflation, but gains were made.

All this does not mean that GDP is useless, just that it should be understood and used wisely.

There are many more economic lessons in the pandemic, like the subsidized vaccines and boosters we are all getting, but they are public-policy bugs that deserve their own separate column.

Nation World News Desk
Nation World News Deskhttps://nationworldnews.com
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