The appearance of a new strain of the H1N1 virus, also called the "swine flu," urges us to reconsider public immunization programs. The present article is an economic critique of the widely held view that governments should intervene in the case of a pandemic by means of subsidies for vaccines or even by obligating subjects to get immunized. In contrast, I will make the case for a market distribution of these measures.
In order to support the development of a vaccine, the World Health Organization (WHO) already provided manufacturers with the seed virus some months ago.[1] The US government later bought almost 200 million doses of that vaccine.[2] There were also serious talks about the obligation to get a "flu shot." For instance, in the coming weeks you might be forced to get immunized if you work in certain places where the probability of contact with people who have the disease is much higher than usual, e.g., if you are a medic, a nurse, or a police officer.
Within the European Union, Greek Health Minister Dimitris Avramopoulos made it clear in August that "the entire population, all citizens and residents, without any exception, will be vaccinated against the flu"[3] — although up to that point they had not a single death due to this disease.
In Germany, the immunization of the public will most probably begin in late October.[4] So, what can economists say about these government plans?
A truly economic analysis ought to be free from personal valuations and should only consider the facts about how reality is and what we can possibly know about it. Following that basic advice, one cannot support public vaccination by the means of subsidies. I will prove this by applying even neoclassical tools, while adding some Austrian insight. By doing so, I hope I can reach the maximum consensus among economic professionals.
A Comparative Statics Analysis of Public Vaccination Programs
The standard approach to solving the problem of vaccination goes like this: there are some goods that the public somehow values less than they are actually "worth." For instance, it is argued that many people would not take the flu shot, even though it might help prevent them from getting the disease. They would do so because they fail to properly consider the possible costs resulting from their decision.
Moreover, there are supposed to be "spillover" effects: the more people are immunized, the less chance there will be for the virus to spread out. Hence, the aggregate social benefit is somehow higher than the personal valuation of the vaccine by the individuals. This extra social benefit is called a positive externality, and according to the standard analysis, it calls for state intervention by the means of subsidies.
Graph 1The existence of a positive externality, a supposed undervaluation of the vaccination by the public, can be represented by the two different demand curves shown in Graph 1A (the left side of Graph 1). While the aggregate demand of the individuals is represented by D1, the supposed social demand, or utility, might somehow be higher, D2. However, as the social demand is not revealed in actual monetary demand, the quantity of vaccine traded in the market is much lower than would be beneficial from the viewpoint of society as a whole (x instead of x[opt]).
The neoclassical solution here is to subsidize the difference between personal and social demand, with the result that social demand in monetary terms reaches the level of D2. See the right side of the Graph (1B). After the government intervention, the market has reached an optimal equilibrium where there will be higher purchases of vaccine (x[opt]).
However, this reasoning fails to take account of "the unseen," as Frédéric Bastiat called it some 160 years ago.[5] Where do the funds necessary to subsidize the market for vaccines come from? The money has to come from taxes (or from inflation, or government borrowing, both of which can be treated like future taxation).
Obviously, the partial analysis we have just finished above does not allow us to stop here. In fact, it is quite misleading, because it neglects the unseen effects that every action or intervention involves. As Henry Hazlitt once stated,
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.[6]
Graph 2Following Hazlitt's advice, we can add a second market to our analysis that represents the market of every other good than the vaccine (see the right market in Graph 2). In order to subsidize a certain market (see the left side of Graph 2, reproduced from Graph 1B), government needs to tax some other goods or markets. Which one exactly it taxes does not matter: in every case, taxation prohibits purchases of the goods in question (as indicated by the total amount of y instead of y[opt]). That, of course, will lead to a loss of welfare in the respective markets, as is indicated by the red triangle.
Indeed, we know a priori that taxation always lessens social welfare, because government prevents mutually beneficial transactions that would have occurred, and which would have increased social welfare. However, since the precise costs of taxation are — by their nature — "unseen," one cannot measure the total sum of the social costs either.
Admittedly, supplying the public with vaccines could enhance the wellbeing of some, or even of many people. However, every such action by the government involves costs. As the nature of utility is purely subjective, one is doing unsound economics if one tries to "measure" and "compare" the welfare or utility in the markets we are dealing with.
We should therefore not fall into believing that it is possible to geometrically compare the blue box on the left to the red triangle on the right and then calculate the difference. It is not possible to calculate the utility of the vaccine subsidized, nor the utility of the purchases prohibited by taxation. The graphical analysis is just a heuristic device and it does not allow such a valuation, because the real coordinates of the demand curves are never known.
In the end, these costs — as well as the possible benefits — can only be estimated. The problem here is that everyone estimates the actual costs and benefits as he or she sees fit. Indeed, since the disease so far has been quite harmless, many people — like the present writer — may therefore prefer taking the risk of lying in bed for two days in order to save the money that now goes to the pharmaceutical industry.
Furthermore, subsidizing one market with the funds taken from another cannot be "Pareto superior." The widely accepted Pareto criterion holds that a certain change or action increases social welfare if at least one person is better off while no one else is worse off. Such a change is called Pareto superior.
We can easily see that subsidizing a market for vaccines by taxing funds away from other people constitutes a violation of that criterion, for while there are admittedly some people better off, others bear the costs. Hence, if we strictly apply the Pareto criterion to our case, we cannot favor any subsidy for public immunization without falling into personal value judgments.
Vaccination as a Possible "Bad" Rather than a "Good"
I come to the second argument against public subsidies of vaccination, which deals with the lack of knowledge that we face when it comes to the efficacy of vaccination as a medical treatment:
Up to now, we have simply assumed that the immunization of the public will help to prevent a pandemic. However, since the real world is one of vast uncertainty, we cannot be 100-percent sure. In fact, the opposite might also be true: history tells us that some vaccination programs caused side effects worse than the effects of the pandemic they were intended to prevent.
As an example, one should consider the disastrous effects of the influenza vaccination exercised in the United States in 1976–1977. There were many reports of serious brain damage related to the public immunization program. Again, some concerned scientists doubt the efficacy of the vaccine today.
Before the fact, one cannot be certain about whether or not the medicine will fulfill its aim. The problem here is that during an epidemic there is just not enough time for long-term studies, which could prove the safety of the product in question.
Graph 3Within the neoclassical framework of our comparative analysis, the concept of side effects can be illustrated by a cost curve that is much steeper than the one that represents the costs of production (see the line on graph 3 labeled "Social costs"). As a certain percentage of the population develops sicknesses, it becomes clear that every vaccine sold has actually caused harm, lowered welfare, and therefore contributed to the amount of "social cost."
In this case, the vaccine is actually not a "good," but rather a "bad." Obviously, now the optimum would be located at the point x(opt), and not at x. Note however, that while the negative effects of the vaccine are unknown, government will still be trying to raise supply to reach x by subsidies!
Finally, we can briefly show that coercion — which might be applied in order to get the disobedient public immunized — will certainly lessen social welfare. If there is even one person (for example, the present writer), who is not convinced of the actual benefit of the hastily developed vaccine, no coercion can be supported by economists. If I do not want to take the vaccine due to my concerns, forcing me to take it obviously cannot be Pareto superior. In fact, it is anything but.
Implications for Public Policy
While the real benefits of subsidizing public vaccination are highly uncertain, the negative effects are crystal clear: the conscription of resources that is necessary to fund the government program leads to the undersatisfaction of other, more-urgent needs. Taxation surely causes Pareto-inferior results and it does that with economic precision, for it prohibits wealth-enhancing actions that otherwise would be taken. Coercion, as I mentioned above, can be treated alike and should not be considered by any serious economist as a policy prescription either.
As I showed herewith, from a value-free standpoint economists cannot support public vaccination of any type. Nonetheless, economists can offer scientific advice to public officials:
Firstly, from the above analysis we conclude that taking the vaccine should be strictly voluntary. No one — not even persons who are doing jobs in areas with increased risk of infection — should be forced to take something he or she considers possibly dangerous.
Secondly, as we live in a world of uncertainty, the actual costs and benefits of these programs are yet to be discovered. Since these costs are ex ante always unknown, governments should not speculate with the money and health of their people by subsidizing vaccination programs. Rather, they should let individuals decide if they want to get a flu shot or not, and let them purchase the doses with their own money.
Finally, medicine as such — and any vaccination in particular — is still a personal good, not a "public" one, for there exists rivalry of consumption and the possibility of excluding those who are not willing to pay. The best way to supply the public with vaccines, therefore, is the unhampered market, a market absent of any subsidy and absent of any obligation to get a "flu shot."
Remaining Questions
The above analysis actually applied one of the most basic tools of mainstream economics: comparative statics analysis. I added to it only the acknowledgment that economists are not smart enough to know the results of that which is still not done, and I exercised the analysis with respect to the "unseen" costs. My result is that an economist — qua economist — cannot endorse subsidizing public immunization programs. Indeed, that should really not surprise any real member of the profession. But why then is public vaccination so rarely questioned in the media by economists?
The answer to that question could be of certain interest for political scientists. One has to ask the criminological question, cui bono? While economists focus on the implications of individual human action as well as on the laws of spontaneous order deriving from the purposeful conduct of the many, political scientists deal with the interests that lay behind those actions. Hence, the application of the question, "who gains from it?" might give a hint to the true reasons behind government's intervention in the market for vaccines.
Firstly, governments like epidemic environments, because they can "prove" that governments are necessary. Such environments enable them to increase their legitimacy. In this respect it is important to note that the WHO raised the phase of alert from 5 to 6 as early as June. That meant a shift from an "imminent" threat of a pandemic to an "outbreak" or a state of a "global pandemic."[7]
Interestingly, before that decision there were reports of dozens of states urging the WHO to change their criteria for the swine flu.[8] Although we cannot know from the outside how independent the WHO really is, the shift to the highest possible state of alert has probably pleased our governments.
Secondly, for obvious reasons, some companies might go along and lobby heavily for a public vaccination program. For instance, the pharmaceutical industry earns much higher profits by selling their vaccines to the state (whose funds are practically unlimited) than they would if they had to actually prove the efficacy of their products on the free market.
Thirdly, some economists — at least the ones who stand in the positivistic tradition — find a field for new investigations. In other words, they find a reason for being employed. Neglecting the above-mentioned methodological problems of measuring and comparing social costs, they engage in empirical studies that would immediately cease to be demanded if their uselessness ever became known (see, for instance, the paper by Boulier, Datta, and Goldfarb).[9] Lamentably, a lot of economists do not see a reason to promote a laissez-faire approach to vaccines, but rather they endorse more taxes and subsidies.
Conclusion
Our analysis used the present threat of a "swine-flu" pandemic to illustrate the discussion about whether or not public vaccination programs can be favored from a strictly economic viewpoint. It was shown that the argument in favor of subsidizing such programs, which holds that immunization has positive externalities, does not withstand a critical examination.
"Social scientists should inform the public that our government is not necessarily benevolent"A publicly orchestrated campaign against the swine flu by means of subsidies entails highly uncertain benefits but very certain costs. It is methodologically impossible, however, to forecast and compare these costs. And either way, from a dynamic point of view it is Pareto inferior to subsidize the market in question. The decision whether or not to purchase the vaccine should therefore be left to individuals alone.
Social scientists should inform the public that our government is not necessarily benevolent; its members pursuit goals which often differ from the will of the governed. Hence, these scientists should emphasize — and also investigate — the possibility that the current purchases of millions of doses of vaccine by the states might be a deal between the pharmaceutical industry and our public officials.
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Notes
[1] European Public Health Alliance (2009): A(H1N1)v (Swine) Influenza — Frequently Asked Questions
[2] Reuters (July 23, 2009): U.S. Has Bought 195 Million Doses of H1N1 Vaccine.
[3] Reuters/TVNZ (August 1, 2009): Greece to Vaccinate Population for Swine Flu.
[4] Ärztezeitung (October 7, 2009): Impfung gegen Schweinegrippe ab 20.
[5] Bastiat, Frédéric ([1850]2007): That Which Is Seen, and That Which Is Not Seen, Ludwig von Mises Institute (Hrsg.), The Bastiat Collection, Auburn: Ludwig von Mises Institute, pp. 1–48.
[6] Hazlitt, Henry (1979): Economics in One Lesson, New York, p. 17
[7] World Trade Organization, Current WHO Phase of Pandemic Alert.
[8] AP/CNSNEWS (May 19, 2009): Nations Urge WHO to Change Criteria for Pandemic.
[9] Boulier, B., Datta, T., Goldfarb, R. (2007): Vaccination Externalities, The B.E. Journal of Economic Analysis & Policy, 7(1).
