Abstract: The coronavirus epidemic has had a major impact on individuals, businesses and society. Since the outbreak, masks became a rare commodity and prices rose sharply. The controversy lies in whether it is reasonable to regulate mask supply and demand through price hikes, to what extent non-market tools can be used to intervene, and how to intervene. There is also a social ethics perspective besides the market and government perspectives.
It seems a bit out of place to talk about economic concepts when major disasters occur, because what is needed the most now is humanism, while the impression that economics gives is that all activities embody their value through monetization. The coronavirus epidemic has had a major impact on individuals, businesses and society, it has also caused people to rethink and discuss many issues. This essay shares my observation and thinking from a trivial perspective, that is, how to view the rise in mask price.
Since the outbreak, masks have become a rare commodity and their prices rose sharply. People have gone to extreme measures to find masks. Media reported that some organizations were punished for improperly intercepting masks. These phenomena have naturally sparked discussions, such as whether the price of masks is reasonable and how masks should be distributed. The views are often tit-for-tat. The epidemic caused a sudden jump in the demand for masks and a large gap between supply and demand. This is the root of the problem, but the solution to the problem is not so clear. The controversy lies in whether it is reasonable to regulate mask supply and demand through price hikes, to what extent non-market tools can be used to intervene, and how to intervene.
I. Free market prices: efficiency and fairness
The view that supports rise in price believes that prices formed by free market transactions could guide demand and supply, and eventually achieve effective resource allocation. The rising price of masks on the one hand drives consumers to save on mask use and curb the demand increase, and motivates mask manufacturers to increase output and supply on the other hand. Their combined actions help achieve a balance between supply and demand. Higher mask price benefits manufacturers, and the resulting increase in mask supply meets anti-epidemic needs and therefore benefits the entire society.
According to the above logic, we should not blame companies or stores that raise the price of masks. This is the work of the invisible hand described by Adam Smith in The Wealth of Nations. The rational behavior of individuals in pursuit of their own interests is also conducive to the society and represents the effective allocation of resources.
I believe many readers will feel that there is something wrong with this logic. In fact, even in a free market economy like the United States, in some states (such as Texas), laws prohibit merchants from raising the price of daily necessities after major disasters. So how do we explain that price hikes are unreasonable, or that price controls are reasonable, from an economic point of view?
One possibility is that the elasticity of supply stays quite low in the short term. For example, even if the price rises, the output of masks will not pick up in the short term due to such reasons as the Spring Festival holiday and quarantine measures that prevent employees from returning to their posts. At the same time, consumers have rigid demand for masks due to the epidemic, hence price increases show no obvious inhibition towards demand. The (high) prices formed by free market transactions cause the loss that consumers bear (decreased consumer surplus) to exceed producers' profits (increased producer surplus), reducing the utility of society as a whole. In this case, a price lower than the price formed by balanced supply and demand will instead maximize the utility of the whole society.
However, the hypothesis of low supply elasticity only suits the short term. As time adds up, the response of supply to rising prices will reveal itself. In fact, we have seen the production of masks accelerate. At all events, looking at what price is reasonable for masks from the perspective of consumer/producer surplus is still under the framework of mainstream microeconomics. The logic behind is that individual's willingness to pay reflects the urgency of mask demand (utility brought by masks), the money price of masks guides resources towards effective allocation, which is the utility maximization of the whole society.
Another perspective questioning the rationality of free market prices is fairness, which may be perceived intuitively. When the price of masks goes up to several dozen yuan or more per mask and becomes unaffordable to low-income groups, is it still acceptable to social ethics? High prices may be the most effective way to achieve a balance between supply and demand, but should the value of human life be assessed by money prices or willingness to pay? Under the framework of mainstream economics (neoclassical economics), resource allocation guided by free market prices is the allocation under a given wealth distribution, which makes no value judgment about whether the current wealth distribution is reasonable or not.
Furthermore, masks show negative externalities in epidemic prevention. Assuming that masks have a great effect in preventing the spread of the virus; if the price of masks skyrockets so much that some low-income groups cannot afford it, it will affect everyone. In this case, fairness and efficiency are unified, and the unfairness caused by high prices (some people do not wear masks) will reduce the overall epidemic prevention efficiency.
II. Non-monetized distribution: time and urgency
If we agree that in the event of a major disaster, resource allocation guided by market price is not optimal or acceptable to the society, what other ways do we have?
One may be to allocate resources on a first come, first served basis. In some places, people line up to buy masks in stores. There is a limit on the number of masks each person could purchase. The implication is that the price is lower than the price formed by free transaction. In this case, resources are actually allocated by time instead of currency. Whoever has the time to line up early and wait in queue is more likely to get masks. Although it does not have the downside of "highest bidder wins", it is not necessarily reasonable. The "urgency" level of late comers who failed to buy masks may be higher than those early birds.
Another way is to allocate resources according to their urgency. In this regard, charities and institutions of public character often play a positive role, provided that their own governance mechanisms are not problematic, but a more important role is played by governments or the public sector. As for the definition of urgency, it is relatively clear in some situations. The demand for medical supplies including masks in this outbreak from medical workers is more urgent than that from ordinary people, which probably arouses no controversy. Therefore, if the government decides to prioritize medical supplies for front-line medical workers, there should be no objections.
However, for the general public, how to differentiate levels of urgency is not so clear. In some places, neighbourhood or village committees notify residents to register and buy masks at designated pharmacies or locations with IDs through bulletin boards and official WeChat accounts. Although there is a possibility that some non-local residents are not covered, on the whole, it shows the level of fine management by local governments.
The above three distribution approaches, currency (market price), time (queuing in line), and urgency are not mutually exclusive. In reality, we probably need all three of them to play their roles and work together to fill the gap between supply and demand of masks and other medical supplies brought by the epidemic. Dependence on free market prices alone to guide supply and demand may bring on unfairness and may not send limited medical resources to places most in need. Nevertheless, a non-functioning market is incapable of steering production to rapid expansion to meet increased demand.
III. Issues of broader relevance
The current gap in the supply of masks may seem to be a phenomenon of a particular period, but in fact, shortage and maldistribution of medical resources are of universal relevance. One example is the difficulty of outpatient registrations in hospitals of large cities. The epidemic urges us to reflect on how to improve the efficiency of China's medical, public hygiene and epidemic prevention system. There is a need to shore up on our weak spots in both quality and quantity. A fundamental issue is the roles of market, public inputs and policies in the allocation of medical and public hygiene resources.
After the outbreak, public hospitals supplied all the medical teams sent to support Wuhan from all over the country. However, number-wise, private hospitals accounts for half of China's hospitals, which seems to highlight the importance of public input in the basic security in areas concerning people's livelihood, such as medical services.
At present, the trade-off and balance between resumption of work and epidemic prevention is a real problem. The more contagious and virulent the virus is, the more stringent quarantine and control measures are needed, the greater their impacts on the economy are. Meanwhile, the longer the epidemic lasts, the greater its impact on the economy will be. Whether we are reaching or approaching the inflection point of the epidemic requires the professional judgment of epidemic prevention experts. However, whether to return to work or not, as well as the scope and pace of returning to work also involve economic considerations. Under the circumstance of uncertain epidemic evolution, the trade-off between the two is indeed a problem.
From a humanitarian and humanistic perspective, being livelihood-oriented means that the contradiction between the two can be reconciled. Before the epidemic hits a turning point, epidemic control remains the number one priority. Efforts to ensure economic growth should start with industries and economic activities relevant to people's livelihood, and less affected areas, focusing on supporting low-income groups hit by the epidemic. As we reach the inflection point and the epidemic begins to subside, more people could go back to work until economic activities return to normal. In the meantime, macro policy should stay structure-oriented and focus on supporting regions and industries hit hard by the epidemic.
IV. Reflecting on mainstream economics
When people began to reflect on mainstream economics after the global financial crisis, they found that markets are not always effective. One of the key factors is the procyclicality of finance, which requires strengthening financial supervision and the counter-cyclical regulation of macro policies. It is generally believed that this involves how to balance the market and the government in resource allocation. Economic thinking is leaning towards Keynesianism instead of the (neo) classical economics. In the discussion of mask prices, the problem is generally viewed from the government and market perspectives as well.
However, we should also reflect on the evolution of classical economics. The neoclassical and traditional classical economics have one thing in common—advocating economic liberalism, they also differ in that neoclassical economics has replaced the labor value theory of classical economics with the marginal utility theory of value. Today, speaking of efficient allocation of resources through market, people often refer to "the invisible hand" in The Wealth of Nations by Adam Smith, father of classical economics. Another book of Adam Smith, The Theory of Moral Sentiments, proposes that people are born with compassion, explains the roots of moral sentiments such as justice, beneficence and self-control, and reveals the foundation for a sustainable and harmonious human society.
These two books may seem contradictory, which is not the case though. The Theory of Moral Sentiments was published earlier than The Wealth of Nations, and the latter contains examples of how "the invisible hand" fails to promote social well-being. Adam Smith's labor theory of value has influenced Ricardo, Malthus and Marx. These economists have major disagreements over some key issues, but one thing in common is that their economic analysis all involve value judgments. Classical economics is also known as political economy.
The neoclassical school of economics holds that the value of a commodity depends on its utility provided to consumers. The latter is reflected in consumers' willingness to pay. The neoclassical school regards economics as an analogue of natural science. The application of mathematical models has been maximized in the past 40 years that people often forget an important premise—given wealth distribution. The widening gap between the rich and the poor worldwide in the past 40 years has prompted people to reflect on the prevailing neoclassical economics, and review not only Keynesianism, but also political economy represented by Adam Smith. There is also a social ethics perspective besides the market and government perspectives.
In the face of such a major epidemic, some have died, and medical workers are risking their lives on the front line. We need to be more sympathetic than usual, work together and support each other. If we think this way, whether to allow free transaction to determine the price of masks will no longer be a problem to be fixated on.
