Paying more for airline passengers to give up seats

In a previous blog post about the mishandling by United Airlines of a passenger that had already boarded the plane, I suggested the following thought experiment: “Suppose United offered $10,000 to each person who gave up their seat. I suspect most passengers sitting on the plane would have volunteered.”

The next day, AP News reports that “Delta OKs offers of up to $9,950 to flyers who give up seats.”

This must be just a coincidence.

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A United case for free markets and clearly defined rights

A lot has been written and said about United Airlines and their mishandling of a problem of overbooking. In case anyone missed the story, a United Airlines flight was overbooked. The airline also needed to fly crew members to the plane’s destination. The airline asked for volunteers to give up seats and even offered some money as an inducement, but that wasn’t enough. So the airline randomly selected passengers to remove involuntarily. Three agreed to leave the plane but one refused. The airline called airport police, who forcibly removed the passenger. Photos and videos of the passenger being dragged out of the plane caused worldwide criticism of the incident and airline. There are numerous memes floating on the internet now inspired by the event.

I am not going to criticize the airline or defend it. Others are doing that. However, I think the story provides an ideal case for illustrating two important economic principles: the superiority of free markets and the importance of clearly defined property rights.

First, economic systems determine how scarce resources are allocated. There are different ways of doing this. One involves free markets, where the exchange of money determines how resources are reallocated. Another involves various forms of command and control, where government or other entities dictate who does what and what goes where.

The airline had (some may say created) a problem of scarcity. There were more people who needed seats than there were seats available. A free market solution to the problem is simple: offer enough money to induce people to voluntarily give up their seat. Here is a thought experiment. Suppose United offered $10,000 to each person who gave up their seat. I suspect most passengers sitting on the plane would have volunteered. The airline said it offered compensation (the WSJ article linked above states that the airline offered up to $1,000). Clearly, the airline did not offer enough. In a free market environment, if the buyer values the resource more than the holder of the resource does, then an efficient exchange can occur if the buyer offers more than the seller’s value. If it was worth more than $1,000 a seat to United to get a crew member on the plane, then the airline should have offered more. If it was not worth more than $1,000, then the airline should not have pursued the matter further. That is the simplicity of the free market.

When there is command and control, such as when the government decides who flies and who doesn’t, then the government uses the power of the state to enforce its preferences, which we saw clearly here when the airline utilized police to drag an unwilling passenger off the plane. If the airline had utilized market principles, then there would have been no incident worth reporting. Stated differently, when markets function well (and when they are allowed to function well), then there is almost never a story to report. I find that interesting.

Second, when there is confusion about property rights, then there will be conflicts. People who buy plane tickets, either with a seat assignment or who are sitting in a seat, believe they have rights to the seat on the plane. In contrast, airlines not only can overbook but also can involuntarily deny boarding of passengers and even tell passengers they have to get off the plane, suggesting the airline believes it has rights to the seat on the plane. (Anyone interested can read United’s Contract of Carriage document here, especially rule 25, which describes what the airline’s obligations and rights are with respect to “denied boarding compensation”).

Regardless of whether passengers or airlines actually own rights, it is the beliefs they hold that matter most here. If passengers believe they have rights to the seat and if airlines believe they control those rights, then there will be a conflict when there is a problem of overbooking (that is, economic scarcity). Markets won’t work well here because there is no basis for determining who should pay and how much, since there is uncertainty about who initially owns the right to be transferred. If the airline believes it has the right, then it doesn’t need to offer any compensation. It can just drag unwilling passengers off the plane and place other passengers in the vacated seats.

The Nobel winning economist Ronald Coase described this problem and pointed to a solution: make clear who has rights to the seat. According to the Coase Theorem, bargaining is efficient when property rights are clearly defined and when bargaining is reasonably feasible. Airlines have demonstrated that bargaining for overbooked seats can work if they just offer enough compensation, suggesting they effectively acknowledge the beliefs of passengers that passengers hold rights to seats they have paid for, regardless of what their overbooking rules say.

The lesson here is therefore simple. If airlines are going to overbook their flights, then they should be prepared to pay passengers enough to induce volunteers to vacate their seats on the plane.

The connection between strong families and secure property rights

While doing background reading for a research project I am conducting, I came across a book by Bertrand Russell entitled Marriage and Morals, which he published in 1929. The purpose of the book is to advocate a new way of thinking about marriage and sexual morality.

Russell is a too liberal for my liking, and he doesn’t hold a high opinion of religion. For example, he gives two objectives for the book. The first is “to eliminate the elements of superstition” or religion in defining what sexual morality ought to be. The second is “to take account of those entirely new factors which make the wisdom of past ages the folly instead of the wisdom of the present.” Here he refers to things like contraception and other “modern discoveries” that supposedly enhance the sexual freedom of people by removing the worry of creating an unwanted child or experiencing other concerns. At one point in the book Russell laments that people still have “fears” that are “irrational,” because of the “failure of psychological adaptation” to the new morality he advocates.

While I disagree with the overall message of the book, Russell makes a rather interesting observation about the importance of the family and the connection between family and secure property rights. In the first chapter, Russell states that one of the most important reasons that people engage in economic activity is to provide food and other benefits not merely for themselves but “for the sake of the family”. He then says that “as the family system changes, economic motives also change.” For example, without a family there is little motive for an adult to purchase life insurance. Moreover, “most forms of private saving would nearly cease if children were taken away from their parents and brought up by the State as in Plato’s Republic; that is to say, if the State were to adopt the role of the father, the State would, ipso factor, become the sole capitalist.” He continues by saying “that if the State is to be the sole capitalist, the family, as we have known it, cannot survive … [for] it is impossible to deny an intimate connection between private property and the family, a connection which is reciprocal.”

In other words, we need private property for the good of the family, and we need family for the preservation of property rights. If property rights are weakened, then we weaken the family. If the family is weakened, then we lose the basis for protecting private property. One feeds the other. In the extreme, if family is incapable of properly rearing children–or if the government claims that the family cannot effectively raise children–so that the State must take over that responsibility, then the power of government to take and control property will be at its greatest. I should add that Russell was an admirer of the Soviet Union, although he never fully embraced communism.

I’ve never thought about the connection between family and property rights until now. I find the connection very interesting. Implications? Well, if you believe in the importance of family, then fight to preserve rights to property. And if you believe in the importance of protecting private property, then fight for strong families. We need both for a stable and healthy society.

Declining moral values in the U.S.

An important area of research for me involves the study of how moral values relate to economic conditions of society and the well-being of individuals. For example, a few years ago I published a study (here) describing how to measure the generalized morality of countries, and I linked that measure to economic conditions within countries. Currently I am trying to understand trends in moral values and how and why they change over time.

It is not uncommon for people to bemoan a decline in moral values. For example, in 2015 a Gallup Poll (here) found that “Most Americans (72%) continue to believe the state of moral values in the U.S. is ‘getting worse,’ while 22% say it is ‘getting better.'” But is there evidence supporting the ‘decline in moral values’ story? Yes, at least in the United States.

I like working with a database called the World Values Survey, which is a compilation of face-to-face interviews with adult citizens ages 18 and older conducted in many countries around the world. Respondents are asked many questions about what they believe, such as perspectives about religion, politics, social values, and so forth. The survey is conducted in multiyear waves about every five years or so. It began in 1981. The most recent wave in which data is available (number 6) began in 2010 and involves work in 57 countries around the world with more than 85,000 respondents. The organization behind the study is currently preparing for the next round of studies.

Note the following two charts for respondents in the United States. The data are reported for each of the six waves. The number of respondents in each wave is at least 1,000 (and so allows for meaningful statistical analyses).

Social trends

This first chart (‘trends in social values’) shows the percent of people who believe that different social issues are not justifiable. There is a clear downward trend. If these represent genuine moral values, then here is the evidence. I could add others. For example, in 1981, 69 percent of people believed that prostitution was not justifiable, but in 2005 the number declined to 47 percent.

Economic trends

This next chart (‘trends in socio-economic values’) shows the percent of people who believe that certain actions by individuals are not justifiable. There is also a downward trend, although it is not as pronounced as is the case for social values. I call these ‘socio-economic values’ because I use them to construct my measure of ‘generalized morality’ mentioned above.

Why is there a decline in moral values? Well, that’s the million dollar question. While we can easily point to correlations, identifying causality is notoriously difficult in social science research. But sometimes correlations suggest patterns and plausible explanations. For example, declining religiosity and confidence in churches might be an explanation. Religions have traditionally played a major role in articulating moral standards in society. If people become less religious and are less tied to churches over time, then that might explain why moral values decline.

Religion

Consider this chart (‘importance of religion’), which shows various indicators of religiosity. While most people in the United States continue to believe in God (almost 90% according to the most recent wave of the World Values Survey), they are becoming less connected to Him. For example, only about 60 percent of people believe that God is important to them. There is also an alarming decline in confidence in churches. In 1981, 46 percent of people had a lot of confidence in churches, but in 2010 the percent had declined by more than half to 19 percent. If we don’t trust our churches then we will not trust what is taught there, such as being moral and having high moral standards.

At the risk of being accused of confusing correlation with causation and overlooking the many complicated factors affecting moral values in society, I am tempted to call this one. We need a spiritual and religious revival in the United States if we want to see a reversal of declining moral values in society. We need to go back to church. We need to listen to preachers and Sunday School teachers. We need to study scriptures and pray and do other religiously meaningful things. If we believe in God, then we need Him to be important to us. Why not. We’re important to Him.

The latest issue of Agriculture and Human Values is in print

TheAHV_10460 latest issue of the academic journal I edit, Agriculture and Human Values, has just been published. This is the official journal of the Agriculture, Food and Human Values Society. The table of contents to issue 1 of volume 34 is here.

A brief summary of the articles in this issue is as follows: Fouilleux and Loconto examine the conventionalization of organic agriculture through the perspective of tripartite standards regime of governance. Jones et al examine the perceptions of students from developing countries about agriculture as an occupation. Contzen and Forney introduce a typology of farm family configurations in a study of Swiss farming. Mann and Bonanomi offer a framework for assessing the ethical implications of large-scale land acquisitions in developing countries. Papaoikonomou and Ginieis assess the transformative nature of local food systems by focusing on the practices, narratives about and governance characteristics of CSAs in Spain and New York City. Arcari uses discourse analysis to examine how meat and animals are discussed and framed in debates about animal agriculture. Stone and Glover use the lens of embeddedness to examine “rice worlds” of the Green Revolution, Golden Rice and heirloom landrace rice. Kurth and Glasbergen examine the effectiveness of halal certification organizations in a study focusing on the Netherlands. Bellante uses a case study of a local food movement in Mexico to provide a more balanced view of their advantages and limitations. Poulsen examines the degree to which urban farms are able to overcome critiques about civic agriculture. Desmarais et al document changing land ownership patterns in Canada. Zepeda and Reznickova describe the evolution of a Slow Food movement at the University of Wisconsin. Additionally, Jennifer Clapp, S. Ryan Isakson and Oane Visser introduce a collection of four papers on the complex dynamics of agriculture as a financial asset. The issue also contains book reviews and a list of books received.

Corruption, 2016

Transparency International is a non-governmental organization, headquartered in Berlin, with a mission to document and root out public corruption worldwide. The organization defines corruption as “the abuse of entrusted power for private gain. It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.”

For more than two decades Transparency International has produced an annual Corruption Perceptions Index. The most recent edition of the index (here) ranks 176 countries from the least corrupt to the most corrupt. The index ranges from a scale of 0 to 100, “where a 0 equals the highest level of perceived corruption and 100 equals the lowest level of perceived corruption.” The Index  “aggregates data from a number of different sources that provide perceptions of business people and country experts of the level of corruption in the public sector.”

CPI2016_Map_web

The least corrupt countries are Denmark, New Zealand, Finland and Sweden. They always stay at the top of the list. The most corrupt countries are Syria, North Korea, South Sudan and Somalia. Denmark’s score is 90 while Somalia’s is 10. The United States is number 18 on the list, with a score of 74, below Canada, Germany and the UK. That’s alarming. Not that the US is below other countries but that the US is more than halfway to the midpoint of the CPI scale (Slovakia and Croatia have scores of 51 and 49 respectively).

Corruption matters because it erodes public trust in government and business, and trust is very important for promoting economic growth and well-being. For example, note the following figure I produced showing the correlation between corruption and per capita gross domestic product. Of course, correlation does not mean causation. And we can debate whether corruption produces low growth or whether low growth invites corruption, but the correlation is stark. Highly corrupt countries are very poor. Moreover, for every 10 point improvement in a country’s perceived corruption, GDP per capita increases by more than $7,000 (that’s what the equation in the figure shows).

CPI-GDP2016

Transparency International also draws a connection between corruption and social inequality. As noted on their website (here): “it’s timely to look at the links between populism, socio-economic malaise and the anti-corruption agenda. Indeed, [US President] Trump and many other populist leaders regularly make a connection between a ‘corrupt elite’  interested only in enriching themselves and their (rich) supporters and the marginalisation of ‘working people’. Is there evidence to back this up? Yes. Corruption and social inequality are indeed closely related and provide a source for popular discontent. Yet, the track record of populist leaders in tackling this problem is dismal; they use the corruption-inequality message to drum up support but have no intention of tackling the problem seriously.”

In other words, we preach virtues but don’t practice them ourselves.

Which reminds me. After discussing these ideas in my applied ethics class I suggested that students can obtain an automatic A in the class if they leave me a $100 bill with their name written on it in pencil. Some students laughed while others wanted to negotiate the price. Apparently they didn’t learn anything.