Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't John Jr. (the dot read aloud .txt) 📖

Because the mother was on welfare, the store took a big risk by selling her a stereo. Without the assurance of collateral, the store would probably have refused to extend credit to the woman. Reclaiming the stereo in the event of a default was not a sufficient guarantee for the store because it may have been difficult and expensive to retrieve the unit, and it may even have come back damaged. The most sensible reaction to this verdict—for this particular store and others—would simply be to stop extending credit to poor people. And the people this would most harm, obviously, are the poor; poor people are big credit risks, but they are also frequently the customers most in need of credit. In this case, the market created a method—collateral—to help the poor gain access to expensive goods, but the courts effectively took it away from them—in order to help a single poor person.

Another important and particularly heart-breaking case involved an eight-month-old girl, Anita Reyes. She was diagnosed with polio two weeks after receiving a polio vaccine made by Wyeth Laboratories.56 In 1970, Anita’s father sued Wyeth, claiming Reyes contracted the disease from the vaccine. The court understood that Anita clearly had contracted the disease before she was vaccinated, as the strain she contracted differed from the strain used to make the vaccine. But it wanted to hold someone liable for the suffering of this poor little girl, so it ordered Wyeth to pay what amounted to over $850,000 in today’s dollars. 57

The court argued that someone had to be compelled to assist families such as Anita’s “until Americans have a comprehensive scheme of social insurance,” and that this someone should be the vaccine manufacturers. Judgments like this established a precedent that companies can be held liable for problems for which they are in no way responsible, just so that someone will pay for whatever problem has arisen.58

The court’s desire to help out Anita’s family was fully understandable. But once again, the decision had larger economic effects that harmed other disadvantaged people. When the courts began holding vaccine companies liable for large judgments unrelated to their products, the firms had to raise prices on their vaccines in order to cover these higher costs. And these liability costs are now enormous, accounting for over 90 percent of the price of childhood vaccines.59

The unfortunate economic reality is that by improperly favoring individual children like Anita, courts have forced the price of vaccines high enough that some poor families can no longer afford them; liability rule changes decreased the number of children getting vaccinated by an estimated 1 million.60 Anita’s family got paid, but other poor children are forced to go without vaccinations and are more likely to get the very disease that afflicted Anita.

Let’s look at one last example of harmful court intrusions into the free market. This one involved workers’ rights to sue their employers for job-related injuries.61 Many jobs that are particularly dangerous include a premium to compensate for these risks; although the overall wages for such occupations may not be high, they are higher than they would be if the jobs were safe. For some occupations, such as policemen and firemen, the potential hazards are direct and immediate. For others, such as those that may expose employees to toxic chemicals, it may take years before the harm becomes evident.

Until the late 1970s, worker compensation insurance gave workers easy access to compensation for job-related injuries without having to hire lawyers. In exchange, lawsuits against employers were strictly limited. During this period, the salaries of American workers who faced the average occupational exposure to carcinogenic hazards—workers in industries such as tobacco manufacturing—included a “risk premium;” these higher wages over their lives totaled over $185,000 in today’s dollars. 62 Not too bad, especially when you consider that the highest estimates that someone will get cancer from job-related exposures range from 0.004 to 0.016 percent.63 But in the late 1970s, a legal change made it much easier for workers to sue their employers. As a result, firms no longer had to pay such high salaries to compensate workers for job-related risks. The risk premiums included in the wages for these jobs were either largely or completely eliminated, and salaries fell accordingly.64

This legal change created real economic imbalances for jobs—such as those that risk exposure to carcinogens—where illnesses only appear after a long period of time. True, employers were partly compensated for the lawsuits by the decline in wages. But workers who had been employed prior to this legal change had already been compensated for these risks with higher wages over many years. Allowing them additionally to sue their employers essentially compensated them twice for their risks. The end result was that workers were laid off and companies went bankrupt.65

Judges are usually smart people, but some of them have yet to learn an important lesson: the free market works.

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Reputations

Reputations are a vital element of our economy and our society. They are infused in everything from the pricing of consumer goods to the management of political campaigns. But their importance is frequently overlooked by analysts, legislators, and even the general public. This poses some important problems, for misunderstanding reputations can have profoundly harmful consequences. In the political arena, it has led to the adoption of the McCain-Feingold bill and other campaign finance laws that inadvertently favor incumbents, lower the competitiveness of elections, and reduce voter participation rates. Overlooking the value of reputations has also resulted in the application of excessively high penalties for high-income criminals and for companies convicted of fraud.

The reason for these unexpected outcomes becomes clear if one applies a little economic analysis to the overall role played by reputations in our society. We intuitively understand how reputations work in many aspects of our lives, but we rarely consider how they