Want to keep up to speed on what economists have to say about the pandemic? The Centre for Economic Policy Research has started a new journal, Covid Economics: Vetted and Real-Time Papers, with VERY short publication lag-times. The first issue of the journal, with six papers, appeared April 5. The 14th issue (not a typo) of the journal appeared today, May 6, with these eight papers:
OPTIMAL LOCKDOWN
Fernando Alvarez, David Argente and Francesco Lippi
POLICY INCENTIVES
Roberto Chang and Andrés Velasco
MISSING EMERGENCIES
Jorge Alé-Chilet, Juan Pablo Atal and Patricio Domínguez
HEALTH VS. WEALTH?
Peter Zhixian Lin and Christopher M. Meissner
MARKETS GET COVID
Mariano Massimiliano Croce, Paolo Farroni and Isabella Wolfskeil
HEALTH VS. GDP: NO TRADE-OFF
Sangmin Aum, Sang Yoon (Tim) Lee and Yongseok Shin
SOCIAL DISTANCING AROUND THE WORLD
Gonzalo Castex, Evgenia Dechter and Miguel Lorca
WHO CAN WORK AT HOME?
Isaure Delaporte and Werner Peña
If you want to keep up to speed with what a lot of economists are writing and thinking about the pandemic, or if you are an economists with a COVID-19 paper you would like to publish now, not a year or two from now, the new journal is a place to look.
Wednesday, May 6, 2020
Tuesday, May 5, 2020
The Federal Reserve Gets Ready to Buy Corporate Bonds
A few years back, the question "should the Federal Reserve buy corporate bonds?" was a hypothetical. Right now, the Fed is poised to plunge into doing so. For details, the New York Federal Reserve has a FAQs webpage: "Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility" (dated May 4, 2020). The Fed notes:
You may have questions. For example, how much money?
The Fed is starting with $50 billion for the "Primary" fund and $25 billion for the "Secondary" fund. The idea is to then leverage this amount with debt in a 10:1 ratio so that it could end up financing $750 billion in purchases.
Isn't the Fed prohibited by law from investing in US companies?
Yes. So technically, what's happening is that a "special purpose vehicle" is being formed. The Fed writes: "Initially, BlackRock Financial Markets Advisory will be the investment manager, acting at the sole direction of the New York Fed on behalf of the facilities. Once the exigent need to commence operations of the facilities has passed, the investment manager role will be subject to a competitive bidding process."
Isn't this evading the law?
There's a provision of the Federal Reserve Act, section 13(3) of the law, which allows "broad-based" lending under ""unusual and exigent circumstances." As a recent discussion of emergency Fed lending from the Congressional Research Service points out, "This obscure section of the act was described in a 2002 review as follows: 'To some this lending legacy is likely a harmless anachronism, to others it’s still a useful insurance policy, and to others it’s a ticking time bomb of political chicanery.' ... Section 13(3) authority was not used to extend credit to nonbanks from 1936 to2008. This authority was then used extensively beginning in 2008 in response to the financial crisis—in very different ways than it had been used previously." In short, section 13(3) gave the Fed the power to extend it's lending in 2008. The Dodd-Frank legislation in 2010 left 13(3) in place. It's now being used again in a different way.
How long will this go on?
The Fed writes: "The CCFs will cease purchasing eligible corporate bonds, eligible syndicated loans, and eligible ETFs no later than September 30, 2020, unless the CCFs are extended by the Board of Governors of the Federal Reserve System and the Department of the Treasury.
Was it a good idea to do this?
One fundamental job of any central bank, including the Federal Reserve, is to be a "lender of last resort." The basic idea here is that their can be times of panic, when financial markets enter a vicious circle in which lots of borrowers are defaulting because no one is willing to lend, and no one is willing to led because lots of borrowers are defaulting. The central bank can break through this logjam by being willing to lend, or by being willing to purchase debt-based financial instruments at a time of financial difficulty. Indeed, the central bank can often make money by being the one willing to lend in the depths of crisis. For example, the loans the Fed made back in 2008-9 were all repaid in full, and its purchases of mortgage-backed securities at that time have held their value.
Moreover, when the Fed announced this policy on March 23, it had an enormous and immediate effect in corporate credit markets. A number of companies--Ford, Boeing, Carnival, and others--were desperate to borrow, but having a hard time finding a borrower willing to lend at a moderate interest rate. After the Fed announced its policy, which at that moment consisted only of announcing a future willingness to buy corporate debt, credit markets for corporate lending loosened. The famous investor Warren Buffett offered his view that credit markets were approaching a "total freeze," and lavished copious praise on the Fed, saying "Jay Powell, in my view, and the Fed board belong up there on the pedestal."
But there are also dangers here. There are sound reasons to have some separation between the Fed and individual companies, and it seems likely that there will be political pressure, sooner or later, for the Fed to buy debt in companies with the best lobbyists. In addition, I've noted in previous posts over the last few years that the US (and the world) have been experiencing an upsurge of debt, and that the riskiness of debt seems to be rising (for example, here and here).
Thus, the Fed faces a balancing act here. Preventing what Buffett called a "total freeze" in credit markets so that companies can keep functioning during the worst of the pandemic can be a sensible "lender of last resort" policy. Maybe the Fed's promise of being willing to intervene in these corporate credit markets will do most of the work, and at the end of September any additional lending from the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility can be officially closed down. But having the central bank accumulate large quantities of already shaky corporate debt, especially if some of those decisions seem driven by political considerations, also runs a danger that it could weaken the Fed, both financially and in terms of its independence from the pressures of day-to-day politics.
In general, the availability of credit has contracted for corporations and other issuers of debt while, at the same time, the disruptions to economic activity have heightened the need for companies to obtain financing. These disruptions have been felt by even highly rated companies that need liquidity in order to pay off maturing debt and sustain themselves until economic conditions normalize.
The PMCCF will provide a funding backstop for corporate debt to Eligible Issuers so that they are better able to maintain business operations and capacity during the period of dislocation related to COVID-19. The SMCCF will support market liquidity for corporate debt by purchasing individual corporate bonds of Eligible Issuers and exchange-traded funds (ETFs) in the secondary market. ...
The PMCCF will provide companies access to credit by (i) purchasing qualifying bonds as the sole investor in a bond issuance, or (ii) purchasing portions of syndicated loans or bonds at issuance. The SMCCF may purchase in the secondary market (i) corporate bonds issued by investment-grade U.S. companies; (ii) corporate bonds issued by companies that were investment-grade rated as of March 22, 2020, and that remain rated at least BB-/Ba3 at the time of purchase; (iii) U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment-grade corporate bonds; and (iv) U.S.-listed ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
You may have questions. For example, how much money?
The Fed is starting with $50 billion for the "Primary" fund and $25 billion for the "Secondary" fund. The idea is to then leverage this amount with debt in a 10:1 ratio so that it could end up financing $750 billion in purchases.
Isn't the Fed prohibited by law from investing in US companies?
Yes. So technically, what's happening is that a "special purpose vehicle" is being formed. The Fed writes: "Initially, BlackRock Financial Markets Advisory will be the investment manager, acting at the sole direction of the New York Fed on behalf of the facilities. Once the exigent need to commence operations of the facilities has passed, the investment manager role will be subject to a competitive bidding process."
Isn't this evading the law?
There's a provision of the Federal Reserve Act, section 13(3) of the law, which allows "broad-based" lending under ""unusual and exigent circumstances." As a recent discussion of emergency Fed lending from the Congressional Research Service points out, "This obscure section of the act was described in a 2002 review as follows: 'To some this lending legacy is likely a harmless anachronism, to others it’s still a useful insurance policy, and to others it’s a ticking time bomb of political chicanery.' ... Section 13(3) authority was not used to extend credit to nonbanks from 1936 to2008. This authority was then used extensively beginning in 2008 in response to the financial crisis—in very different ways than it had been used previously." In short, section 13(3) gave the Fed the power to extend it's lending in 2008. The Dodd-Frank legislation in 2010 left 13(3) in place. It's now being used again in a different way.
How long will this go on?
The Fed writes: "The CCFs will cease purchasing eligible corporate bonds, eligible syndicated loans, and eligible ETFs no later than September 30, 2020, unless the CCFs are extended by the Board of Governors of the Federal Reserve System and the Department of the Treasury.
Was it a good idea to do this?
One fundamental job of any central bank, including the Federal Reserve, is to be a "lender of last resort." The basic idea here is that their can be times of panic, when financial markets enter a vicious circle in which lots of borrowers are defaulting because no one is willing to lend, and no one is willing to led because lots of borrowers are defaulting. The central bank can break through this logjam by being willing to lend, or by being willing to purchase debt-based financial instruments at a time of financial difficulty. Indeed, the central bank can often make money by being the one willing to lend in the depths of crisis. For example, the loans the Fed made back in 2008-9 were all repaid in full, and its purchases of mortgage-backed securities at that time have held their value.
Moreover, when the Fed announced this policy on March 23, it had an enormous and immediate effect in corporate credit markets. A number of companies--Ford, Boeing, Carnival, and others--were desperate to borrow, but having a hard time finding a borrower willing to lend at a moderate interest rate. After the Fed announced its policy, which at that moment consisted only of announcing a future willingness to buy corporate debt, credit markets for corporate lending loosened. The famous investor Warren Buffett offered his view that credit markets were approaching a "total freeze," and lavished copious praise on the Fed, saying "Jay Powell, in my view, and the Fed board belong up there on the pedestal."
But there are also dangers here. There are sound reasons to have some separation between the Fed and individual companies, and it seems likely that there will be political pressure, sooner or later, for the Fed to buy debt in companies with the best lobbyists. In addition, I've noted in previous posts over the last few years that the US (and the world) have been experiencing an upsurge of debt, and that the riskiness of debt seems to be rising (for example, here and here).
Thus, the Fed faces a balancing act here. Preventing what Buffett called a "total freeze" in credit markets so that companies can keep functioning during the worst of the pandemic can be a sensible "lender of last resort" policy. Maybe the Fed's promise of being willing to intervene in these corporate credit markets will do most of the work, and at the end of September any additional lending from the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility can be officially closed down. But having the central bank accumulate large quantities of already shaky corporate debt, especially if some of those decisions seem driven by political considerations, also runs a danger that it could weaken the Fed, both financially and in terms of its independence from the pressures of day-to-day politics.
Why Is the Health Care System Going Broke During a Pandemic?
You might think that a pandemic would lead to larger revenues for the health care industry. But one of the stranger aspects of the lockdown/shelter-in-place reaction to the pandemic is that in order to help society address a severe health problem, it seemed necessary to drive the health care industry into deep financial hardship. Dhruv Khullar, Amelia M. Bond, and William L. Schpero discuss "
COVID-19 and the Financial Health of US Hospitals" in the May 4 issue of the Journal of the American Medical Association. In pretzel-shaped logic, they write:
A May 2020 report from the American Hospital Association, "Hospitals and Health Systems Face Unprecedented Financial Pressures Due to COVID-19," describes the situation this way (footnotes omitted):
COVID-19 and the Financial Health of US Hospitals" in the May 4 issue of the Journal of the American Medical Association. In pretzel-shaped logic, they write:
To limit the spread of disease and create additional inpatient capacity and staffing, many hospitals are closing outpatient departments and postponing or canceling elective visits and procedures. These changes, while needed to respond to the COVID-19 pandemic, potentially threaten the financial viability of hospitals, especially those with preexisting financial challenges and those heavily reliant on revenue from outpatient and elective services.Let's unpack that for a moment. Two goals are listed here. Focus first on the goal of seeking to "create additional inpatient capacity and staffing." As it turned out, closing outpatient departments and canceling elective visits was not actually "needed to respond to the COVID-19 pandemic." Yes, there were some early predictions that it might be needed. But in fact, it wasn't. The other goal is "to limit the spread of disease." I'm certainly no expert here. But it seems to me that hospitals should be pretty good at limiting the spread of disease--it might even be called one of their core competencies. And at least to me, it's not easy to follow the logic that a hospital should not treat outpatients and must cancel elective procedures because of fear of spreading the same disease which the hospital expects will fill up all its bedspace.
A May 2020 report from the American Hospital Association, "Hospitals and Health Systems Face Unprecedented Financial Pressures Due to COVID-19," describes the situation this way (footnotes omitted):
To increase personal and public safety across the country while conserving PPE, hospitals moved to cancel nonemergency procedures. At the same time, many Americans have forgone care, including primary care and other specialty care visits. On March 18, the Centers for Medicare & Medicaid Services (CMS) recommended that most elective surgeries and non-essential medical, surgical and dental procedures be cancelled or delayed during the COVID-19 outbreak. Since then, several governors mandated cancellation of non-essential services in their state.
These measures have resulted in adjusted discharges – a measure that accounts for both inpatient and outpatient services – decreasing by 13% from the previous year Health care providers have raised concerns that patients are forgoing important care, such as chronic disease management, which can further jeopardize their health. An additional consequence of these factors has been steep reductions in revenue for all hospitals and health systems across the country. ... This report attempts to quantify these effects over the short-term, which are limited to the impacts over a four-month period from March 1, 2020 to June 30, 2020. Based on these analyses, the AHA estimates a total four-month financial impact of $202.6 billion in losses for America’s hospitals and health systems, or an average of $50.7 billion per month.Thus, in order to prepare the US hospital system for an outbreak of coronavirus, we made policy decisions with the effect of cutting immediate revenues to that same hospital system by $50 billion per month in the last four months.
Of course, it's not just the financial cost. Health care is not being delivered to those who would have been outpatients. "Elective" surgery doesn't mean "unnecessary" surgery, only that the timing of that surgery can be adjusted to some extent. Primary care patients and checkups have taken a hit, too. A potential overload of coronavirus cases was prioritized over actual immediate patients. In addition, the financial losses don't only apply to hospitals. For example, nursing homes and care facilities that help people rehabilitate after surgery are taking a hit, too.
When this situation is pointed out, those writing from the health care profession seem determined to defend the policy. We can revisit some other some the interactions of good intentions and uncertain information, and what the author Saul Bellow used to call the Good Intentions Paving Company.
But imposing large financial costs on US health care system and on the health of other patients out of a fear of a coronavirus overload has turned out to be a mistake, and you have to acknowledge mistakes to learn from them.
When this situation is pointed out, those writing from the health care profession seem determined to defend the policy. We can revisit some other some the interactions of good intentions and uncertain information, and what the author Saul Bellow used to call the Good Intentions Paving Company.
But imposing large financial costs on US health care system and on the health of other patients out of a fear of a coronavirus overload has turned out to be a mistake, and you have to acknowledge mistakes to learn from them.
Monday, May 4, 2020
Paul Romer: From Pin Factory to Chaos Monkey
Isaac Chotiner has a short interview with Paul Romer in the New Yorker (May 3, 2020, "Paul Romer on How to Survive the Chaos of the Coronavirus"). Lots of interesting comments, but I was especially struck by Paul's comment about how the pandemic poses a challenge for economists when thinking about the benefits of specialization and the division of labor. The usual concerns raised about division of labor, by economists since Adam Smith and Karl Marx, is that workers can be trapped for life in mindless repetitive labor. However, Romer raises a different concern about the tradeoff between specialization and resiliency:
The gains from specialization go all the way back to Adam Smith. He talked about the advantage of a bigger market being that we could have a finer division of labor and be more specialized. There’s this great story about the pin factory where people do various different pieces of the job of making pins. So, we’ve been very attuned to the efficiency gains that come from finer and finer division of labor and specialization. What we’ve underestimated is the systemic risk that that very finely tuned system of specialization exposes us to. And so I think we will start to ask whether there are ways that we could build some more robustness into our whole system.
If I can use an analogy, Netflix used this thing they called the Chaos Monkey, which would go in and just break servers, break routers, just take them offline and then make sure that the Netflix infrastructure system could still keep working. I think, from a public-policy perspective, it’d be good if we started having some drills where we just break things, like, “O.K., you can’t import that input into your pharmaceutical process for six months,” or, “You can’t rely on this mechanism.” We may need a little bit of a Chaos Monkey to help make sure that we’re all building a little bit more resiliency into the things that we do.
Journal of Economic Theory: Fifty Years, Fifty Articles
The Journal of Economic Theory is commemorating 50 years of publication with a special issue that includes 50 of the most prominent papers the journal has published, all of which appear to be open access. As seems appropriate for such lists, only one of the included papers is from the last decade. Instead, these JET papers were a key inflection point for ideas that, guided by the structure and insights from these papers, then developed a substantial follow-up literature of their own. The well-educated economist will already be somewhat familiar with the core findings of many of these papers, so this issue offers a chance to get reacquainted with old favorites and make some new friends, too.
Karl Shell, the first editor of JET, also contributes a short essay with some memories of the founding of the journal, "Fifty years of the Journal of Economic Theory," including that time when a mathematical economist was "an economist who knew a bit of calculus" and when a number of leading journals "did not do dots"--that is, the journal would not allow an author to use the common mathematical symbol of putting a dot over a variable to indicate differentiation over time. Shell writes:
About 52 years ago, the Academic Press (AP) mathematics editor, Edwin Beschler, and I met for lunch at the MIT faculty club. We sat at a table for two, not at the usual economics round table, at which Paul Samuelson held court.
Edwin is a central character in the JET story. He was a professional actor. He had been a math undergrad. He was a splendid science editor. Much of what I know about publishing is from Edwin. ... At the lunch, Edwin said that a committee of economists suggested that he approach me about the possibility of editing a new journal to be called “The Journal of Mathematical Economics”. I expressed interest but only if AP would accept the alternative title: Journal of Economic Theory. Edwin called later to report that the committee would accept my proposed title. He invited me to talk turkey at the AP offices at 111 Fifth Avenue in New York. AP and I struck the deal. ...
What is wrong with “Mathematical Economics”?\
Nothing!
Back in the sixties, the term could be vague. A mathematical economist might be an economist who knew a bit of calculus. Or, he might be someone teaching microeconomics, remedial math, and/or econometric theory. These definitions became unsupportable. We wanted to focus on high-brow and middle-brow and even low-brow economic theory. (In Bob Solow's definition, the brow-level was a measure of the level of the math. I think Bob is proud of being thought of as a middle-brow economist.) On the other hand, we strove to include papers on related mathematics and computation. Math is an essential tool, but our focus was on economic theory. ...
What were the publication options for economic theorists before JET?
- Econometrica, the ES society journal, was — and is — an excellent outlet for economic theory, mathematical economics, and econometrics. It was plagued with senior staffing problems in the 60's. The editor tendered his resignation to become the dean at Northwestern. An unverified story has it that an ES committee was tasked with naming a new editor. According to the story, the committee would gather from round the world and work out a list of top candidates. None of the candidates turned out to be willing. And so on and on seriatim. When the editor became the Northwestern president, submissions were boxed awaiting a new editor. The boxed submissions provided opportunity for JET.
- The Review of Economic Studies was an excellent outlet for growth theory and other theory. It was a UK society journal.
- The JPE is the house journal of Chicago. It was a good place to publish. They were not closed to theory.
- The QJE was the house journal of Harvard. They were insular. I published with Joe Stiglitz an article on the allocation of investment. We used superior dots to denotes time differentiation. We had to find another symbol because HU Press did not do dots.
- The AER is the society journal of the AEA. In my paper on inventive activity and growth, they did attempt dots, but depending on the position in the production line some or all of the dots broke off. In the early years of JET, the AER editor used a printed postcard for rejections: “Your paper put me to sleep. Submit it to JET.” The AER editor rejected the Lucas classic included in this anniversary issue.
So the field was not completely wide open, but it was a good time to start a journal in our rapidly growing field.
- The IER was the house journal of Penn and Osaka. The IER was dedicated to quantitative economics, including mathematical economic theory.
Saturday, May 2, 2020
China's Vanishing Trade Surplus
I wrote "China’s vanishing trade surplus: Now you see it, now you don’t," for the most recent issue of the Milken Institute Review (Second Quarter 2020). Here are the opening paragraphs:
When you think of China, images of R95 face masks, deserted streets and makeshift hospitals no doubt come to mind. But coronavirus notwithstanding, the dominant reality of contemporary China is its formidable economic footprint on the global economy — and its legendary trade surplus, in particular.
We all know that China’s economic success depends on running gigantic trade surpluses. Well, not any more. China’s surplus has been small relative to the size of its economy for a decade and has been approaching zero in the past few years. Indeed, a November 2019 working paper from the International Monetary Fund predicted that China would begin to run a small current account trade deficit in coming years.
Here I’ll explain why China’s trade surpluses mushroomed in size from 2001 to 2007, but then quickly slipped back to pre- 2001 levels. The chronology offers some insight into the fundamental drivers of trade balances (in China or any other economy) and why China’s trade balance is now headed toward deficit. I’ll also opine on what this shift is likely to mean for the ongoing U.S.- China trade war — and for the world economy.
Friday, May 1, 2020
Some Thoughts on Commodification
"Commodification" is a high-sounding has several quite different meanings.
One meaning has Marxist overtones, because in fact it traces to the discussion in Karl Marx's Capital: for example, see "Section 4: The Fetishism of Commodities and the SecretThereof." Marx argues that "the products of labour become commodities." He offers the homely example of a table. He argues that when commodities are bought and sold, society tend to forget that then only have value because of the labor embedded within them, and instead treat these inanimate objects as if they they were meaningful or valuable in themselves ("fetishization"). In this way, Marx argues, the commodification of labor conceals the underlying realities that all value is produced by labor and also about social relationships of different classes.
A second meaning of commodification, from the Merriam-Webster dictionary, is described as the "Financial Definition": "Commodification refers to a good or service becoming indistinguishable from similar products. ... To be considered a commodity, an item must satisfy three conditions: 1) it must be standardized and, for agricultural and industrial commodities, in a "raw" state; 2) it must be usable upon delivery; and 3) its price must vary enough to justify creating a market for it." Examples given include commodities like corn and soybeans, but also financial instruments like mortgages that can be bought and sold."
A third meaning of commodification is nicely phrased by Stephen Clowney in his article" Does Commodification Corrupt? Lessons from Paintings and Prostitutes" (Seton Hall Law Review, 2020, vol. 50, issue 4). He writes: "Commentators fear that when we treat priceless things like fungible commodities—reducing them to dollar figures, putting them in advertisements, and stocking them on shelves—it becomes difficult to appreciate their higher order values." Notice that a concern over whether, say, distinctive works of art become underappreciated when they are bought and sold in monetary terms is quite different from whether markets for interchangeable soybeans and mortgages work well. In turn, both of these are quite distinctive from whether it is useful to think of economic output as nothing more than a manifestation of labor.
Clowney's essay discussed a number of cases where concerns have been raised about "commodification," including examples familiar to many economists like paying money for blood donations or for organ donors. He interviewed a group of 20 professional art appraisers--that is, people whose job is to put a monetary value on art. His questions were meant to explore whether this process in some way affected or reduced their aesthetic appreciation of the art. He writes (footnotes omitted):
The subject of economics is rigorous in stating that the monetary price of an object is not a measure of its value in an deeper sense. An early famous example is Adam Smith's diamond-water paradox, where he explains why some objects with extraordinarily high and even life-preserving value, like water, have low prices, while other objects that are just decorative, like diamonds, have high prices. Smith argues that value-in-exchange, which is an outcome of conditions of supply and demand, is a different concept than value-in-use.
In a similar spirit, one might plausibly argue that concerns over "commodification" are missing the point that "value-in-exchange" is not the same as "value-in-appreciation." Just as it would be a shortcoming of empathy and awareness to treat a painting as nothing more than a price tag, it would be a moral shortcoming to view another human being as nothing more than the exchange-value of their commodified labor. Similarly, it would be a category error to view human workers as interchangeable soybeans. Clowney's art appraiser say that they can "easily and completely compartmentalize their professional duties from their private encounters with art." For many economic purposes, a compartmentalization between professional and private is appropriate.
And yet, and yet. Markets reveal do attitudes about how others perceive value, and people are social attitudes. Even among the art appraisers, for example, one suspects that their compartmentalization is incomplete, in the sense that heir pulses beat a little faster when art prices are rising or falling dramatically.
As befits a term with several distinctive meanings, "commodification" is worth deeper thought. Ultimately, it seems to me that concerns about commodification may be less likely to hold true in cases of highly-skilled workers or high-quality or distinctive products, because in such cases the monetary prices are likely to reinforce and support the appreciation of these skills, qualities, and details. Conversely, concerns about commodification are more of an issue with lower-skilled workers and low-quality or extremely similar products. In markets for commodities like soybeans, crude oil, and mortgage-based securities, we can just sit back and appreciate how these market function smoothly. But when lower-skilled workers are treated as nothing more than the market value of their output, this seems troubling.
Even in a case like paying organ donors, the main concern about commodification seems to me not that a few donors would be compensated (perhaps by health insurance), while recipients of those organs personally recognized the virtue of the donors. The nightmare scenario is medical assembly lines to extract organs, backed by social or government pressure that low-income individuals are expected to raise money by doing so.
I also wonder if people (meaning me) may have a tendency to undervalue the pleasures of what is inexpensive or free, because the low or zero price put upon these goods does not reinforce their value. After a long walk on a hot day, does a glass of tap water over ice taste as good as a bottled water from from the refrigerator? Do I give enough value to sitting on my own lawn furniture at my own house? Serious thinkers from Samuel Johnson to Blaise Pascal have asked whether people are likely to chase diversions, rather than seek happiness in being at home.
Homage: I ran across a mention of Clowney's article in a post by Alex Tabarrok at the ever-useful Marginal Revolution website.
One meaning has Marxist overtones, because in fact it traces to the discussion in Karl Marx's Capital: for example, see "Section 4: The Fetishism of Commodities and the SecretThereof." Marx argues that "the products of labour become commodities." He offers the homely example of a table. He argues that when commodities are bought and sold, society tend to forget that then only have value because of the labor embedded within them, and instead treat these inanimate objects as if they they were meaningful or valuable in themselves ("fetishization"). In this way, Marx argues, the commodification of labor conceals the underlying realities that all value is produced by labor and also about social relationships of different classes.
A second meaning of commodification, from the Merriam-Webster dictionary, is described as the "Financial Definition": "Commodification refers to a good or service becoming indistinguishable from similar products. ... To be considered a commodity, an item must satisfy three conditions: 1) it must be standardized and, for agricultural and industrial commodities, in a "raw" state; 2) it must be usable upon delivery; and 3) its price must vary enough to justify creating a market for it." Examples given include commodities like corn and soybeans, but also financial instruments like mortgages that can be bought and sold."
A third meaning of commodification is nicely phrased by Stephen Clowney in his article" Does Commodification Corrupt? Lessons from Paintings and Prostitutes" (Seton Hall Law Review, 2020, vol. 50, issue 4). He writes: "Commentators fear that when we treat priceless things like fungible commodities—reducing them to dollar figures, putting them in advertisements, and stocking them on shelves—it becomes difficult to appreciate their higher order values." Notice that a concern over whether, say, distinctive works of art become underappreciated when they are bought and sold in monetary terms is quite different from whether markets for interchangeable soybeans and mortgages work well. In turn, both of these are quite distinctive from whether it is useful to think of economic output as nothing more than a manifestation of labor.
Clowney's essay discussed a number of cases where concerns have been raised about "commodification," including examples familiar to many economists like paying money for blood donations or for organ donors. He interviewed a group of 20 professional art appraisers--that is, people whose job is to put a monetary value on art. His questions were meant to explore whether this process in some way affected or reduced their aesthetic appreciation of the art. He writes (footnotes omitted):
Does commodification corrupt? The central finding of my research is that putting prices on creative masterworks does not diminish appraisers’ ability to experience the transcendent values of art. Of the twenty assessors interviewed for this study, not one reported that market work disfigured their ability to enjoy the emotional, spiritual, and aesthetic qualities of artistic masterworks. In fact, most appraisers insisted they can easily and completely compartmentalize their professional duties from their private encounters with art. ... Contrary to the predictions of market skeptics, the appraisers in this study spoke with joyful enthusiasm about their experiences viewing exceptional works of art. Even the most senior appraisers—those who have monetized thousands and thousands of objects—remain passionate consumers of art in their personal lives. The professionals I interviewed all reported visiting museums for pleasure, and many collect art to display in their homes. As a group, they described seeing beautiful pieces as “a charge,” “a rush,” “a thrill,” “fabulous,” “a giggle fest,” “exciting,” and “delight[ful].”Clowney concludes that the "market skeptics have overstated the power of commerce to corrupt the meaning of sacred goods." While I agree with that conclusion, saying that a concern is "overstated" is not the same as saying that the concern isn't a real and meaningful one.
The subject of economics is rigorous in stating that the monetary price of an object is not a measure of its value in an deeper sense. An early famous example is Adam Smith's diamond-water paradox, where he explains why some objects with extraordinarily high and even life-preserving value, like water, have low prices, while other objects that are just decorative, like diamonds, have high prices. Smith argues that value-in-exchange, which is an outcome of conditions of supply and demand, is a different concept than value-in-use.
In a similar spirit, one might plausibly argue that concerns over "commodification" are missing the point that "value-in-exchange" is not the same as "value-in-appreciation." Just as it would be a shortcoming of empathy and awareness to treat a painting as nothing more than a price tag, it would be a moral shortcoming to view another human being as nothing more than the exchange-value of their commodified labor. Similarly, it would be a category error to view human workers as interchangeable soybeans. Clowney's art appraiser say that they can "easily and completely compartmentalize their professional duties from their private encounters with art." For many economic purposes, a compartmentalization between professional and private is appropriate.
And yet, and yet. Markets reveal do attitudes about how others perceive value, and people are social attitudes. Even among the art appraisers, for example, one suspects that their compartmentalization is incomplete, in the sense that heir pulses beat a little faster when art prices are rising or falling dramatically.
As befits a term with several distinctive meanings, "commodification" is worth deeper thought. Ultimately, it seems to me that concerns about commodification may be less likely to hold true in cases of highly-skilled workers or high-quality or distinctive products, because in such cases the monetary prices are likely to reinforce and support the appreciation of these skills, qualities, and details. Conversely, concerns about commodification are more of an issue with lower-skilled workers and low-quality or extremely similar products. In markets for commodities like soybeans, crude oil, and mortgage-based securities, we can just sit back and appreciate how these market function smoothly. But when lower-skilled workers are treated as nothing more than the market value of their output, this seems troubling.
Even in a case like paying organ donors, the main concern about commodification seems to me not that a few donors would be compensated (perhaps by health insurance), while recipients of those organs personally recognized the virtue of the donors. The nightmare scenario is medical assembly lines to extract organs, backed by social or government pressure that low-income individuals are expected to raise money by doing so.
I also wonder if people (meaning me) may have a tendency to undervalue the pleasures of what is inexpensive or free, because the low or zero price put upon these goods does not reinforce their value. After a long walk on a hot day, does a glass of tap water over ice taste as good as a bottled water from from the refrigerator? Do I give enough value to sitting on my own lawn furniture at my own house? Serious thinkers from Samuel Johnson to Blaise Pascal have asked whether people are likely to chase diversions, rather than seek happiness in being at home.
Homage: I ran across a mention of Clowney's article in a post by Alex Tabarrok at the ever-useful Marginal Revolution website.
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