Respecting suppliers and making rational decisions

Feb. 5, 2018 at 4:18 p.m.

Chris Baecker - Guest Column

As I start another year of teaching economics, my conviction has grown only more firm that, for the sake of an optimally efficient economy, two areas deserve particular scrutiny in my class: the role of suppliers and rational decision-making. Oftentimes, there is overlap between the two.

"We're all demanders of goods and services," I remind my students. We know how that works; when the price of barbecue beef brisket goes up, some of us will tend to buy less of it, perhaps in favor of more barbecue pork ribs. But when I ask them how ranchers would react to the same price shift, more than a few hands go up to respond "they would supply less." Consequently, some variation of that scenario finds its way onto every test during the semester.

I was reminded of this when Pfizer announced it was ceasing efforts to develop a treatment for Alzheimer's and Parkinson's disease. Naturally, it was a disappointing setback in the big scheme of things, but it was instructive of the next thought that came to mind; when a medicine eventually does make it to market, it will likely be expensive.

I promptly posted the news to my Facebook page in the hopes that folks would remember this when they're hit with the inevitable sticker shock. Other companies, such as Eli Lilly, continue to search for a cure. There's a big market for it. That's why they, and investors, continue to pour billions of dollars into such efforts, despite the unfortunate likelihood that they will be accused of "profiting off the pain of others."

While a case can be made for patent reform, another supply-related concept I stress to my students is the importance of intellectual property protection, as laid out in Article 1, Section 8, Clause 8 of the U.S. Constitution. If inventors and their financial backers are not allowed to recoup the investment expense, and profit from their discoveries, free from competition for a time, what is their incentive to do so? They have families to feed just like the rest of us. If their devotion of time and resources has no remuneration, they have to redirect their energies to other endeavors.

Alas, emotions get in the way of rational thinking.

Sure, sometimes we don't act rationally: some of us drink too much, some of us eat too much and exercise too little, some of us watch too much TV, some of us refuse to visit the doctor, etc. The push for greater acceptance and inclusion into economic study of such behavior culminated last year in the awarding of the Nobel Prize to Dr. Richard Thaler of the University of Chicago. But irrational behavior can also have damaging effects to the supply side.

The Valero right around the corner from our house went dry, like nearly all other gas stations in San Antonio, in the "Gasocalypse" that followed Hurricane Harvey last summer. The company likely didn't want to be one of those on the receiving end of notices sent out by Attorney General Ken Paxton, alleging violations of "price gouging" laws. So, they refrained from raising prices.

As a result, consumers didn't value fuel properly, topping off daily at the expense of those who were due for routine fill-ups. The passions that drove rational behavior (raising prices in the face of an impending short-term supply disruption) to the wrong side of the law came back to bite voters, fueling heated outbursts from those jockeying for position at the pump.

A similar outcome could result for life-saving drugs, if emotions aren't kept in check.

Many of us have seen someone suffer from one or more of these vicious illnesses, myself included. It's devastating. What seems to be quickly forgotten, however, is the time before a treatment was available. There were zero options. Then, when there is one, people are understandably taken aback at the price. Cooler heads don't always prevail, breeding an implicit sense of entitlement. And that in turn festers into disrespect for the person or entity that spent years and millions or billions of dollars developing a cure.

Some of those researchers themselves may have been driven to do so by having experienced and/or witnessed the ravages of a disease. Our society would be better off if more emotions were harnessed in such a constructive way.

Christopher E. Baecker manages fixed assets for Pioneer Energy Services and teaches economics at Northwest Vista College in San Antonio. He graduated from Victoria High School in 1990. He may be reached via chrisbaecker.com, @chrisbaecker71 and LinkedIn.com.


SHARE


Comments


Powered By AffectDigitalMedia