David R. Henderson  

The Joy of Microwaves

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When our microwave oven broke down a few weeks ago after almost 15 years of faithful service, it got me thinking about how valuable microwaves are to my family, which led to thinking about the consumer surplus we get from microwaves and to some bigger lessons about the value of economic freedom. So I wrote "Life Without a Microwave" for The Freeman. Some excerpts:

Doing without a microwave reminded me of when and why we got our first one. It was in early 1985. Our daughter Karen was only a few months old. We had been saving for a house in the expensive Monterey peninsula, so we didn't want to "waste" money on a microwave. But Karen regularly woke us up in the middle of the night to be fed. One of us, usually my wife, had to get up, go into the kitchen, fill a bottle with formula, get some water boiling on the stove, and warm the bottle. After a month or two of this, we decided to get a microwave. It saved valuable time every night and allowed my wife to be less awake while heating the bottle, which made it easier for her to get back to sleep. The microwave, which had seemed like a luxury to us, turned out to be one of the most valuable things we had ever bought.

Economists have a fancy and useful term for what I'm describing: consumer surplus. Consumer surplus is the maximum amount you are willing to pay for an item minus the actual amount you do pay. We got an immense consumer surplus out of an item whose price at the time was less than $150.

I went from microwaves to smart phones to modern plumbing:
Perhaps you're someone who doesn't get large value out of a smart phone. Okay. But what about the value of your indoor plumbing? Think of what you pay for that: say $10,000 or so upfront for a toilet, sink, bathtub, and pipes, most of which last for 15 years or more. Probably less than $100 a month for your water bill. Annual cost: about $1,000. How much would you be willing to pay for indoor plumbing?

I'm one of the few people still around who remembers what it's like not to have indoor plumbing. I grew up in a small town in midwestern Canada. We didn't get plumbing until I was seven. Even through Canada's harsh prairie winters, we had to go to the outdoor "biffy" to take care of our internal "plumbing." When we got actual indoor plumbing, it felt to us as if we were living at the Ritz. Remembering what it was like to do without plumbing, I would be willing to pay at least $20,000 a year to have it. Now that's consumer surplus.

And from that to penicillin:
Finally, consider penicillin. In one of the best economics articles in the last 20 years, titled "Cornucopia," U.C. Berkeley economist Brad DeLong makes the point succinctly. He writes, "Nathan Meyer Rothschild-the richest man in the world in the first half of the nineteenth century-died of an infected abscess." Had penicillin existed, his early death would have been highly unlikely. DeLong goes on to note that, had he not had antibiotics and adrenaline shots, he (DeLong) would have died of childhood pneumonia.

I went from that to the role of economic freedom in all this progress, pointed out, as DeLong did, that Karl Marx gave due credit to economic freedom and "the bourgeoisie," and then ended by pointing out that economic progress in the 20th century was even more fantastic than in the 19th century:
But here's the amazing thing, which Brad DeLong, in the aforementioned article, points out: Economic progress in the 20th century makes 19th-century progress look trivial by comparison. The main reason for that progress is a high degree of economic freedom. But we're losing that freedom. Let's not.



COMMENTS (14 to date)
Joe Johnson writes:

First, Merry Christmas, Doc!!

Consumer surplus always made me ponder, especially at the drug store. Recently at the Pentagon, I had an enormous headache (one of many at this institution). I went to CVS, and walked through the aisles looking for medicine. At that point, I was almost willing to pay anything for a little ibuprofen. Consumer surplus = potentially very high.

When I found the ibuprofen, I saw a bottle I could buy for $7. Looked great, and since I was "almost willing to pay anything", there was a potential for a very high consumer surplus (if I had bought it.)

But, then I saw the generic brand for $4. Instantly, I was no longer willing to pay a huge amount nor was I willing to pay $7. My consumer surplus instantly changed. Within 2 minutes, my consumer surplus changed from "$X" - $7, to $7-$4.

The idea of what I'm willing to pay being so fluid and potentially always moving, continues to make me wonder what consumer surplus actually is. It's not just that consumer surplus can change from person to person, it's that it can change in the blink of the eye from a singe individual.

Especially so with choice. Choice, at the CVS, reduced my consumer surplus, but made me better off.

Interesting.

David R. Henderson writes:

@Joe Johnson,
First, Merry Christmas to you, Joe. And I miss having you and your provocative comments in class.
Great example and I think I can spread some light on it. Your example shows that how we define consumer surplus depends on the alternatives we're comparing.
Your consumer surplus for ibuprofen was the very large number you first estimated, let's say $43 ($50 - $7). Then you found a close substitute for $4. Your CS from that would have been $46 had not the brand name one been available. But because the brand-name one was available, your CS from the generic was $3.
So there's no inconsistency.
Your example reminds me of what a friend who consults on pricing had to keep drumming into the heads of the MBAs whom he sent out on consulting gigs. The MBAs were often wanting to suggest very high prices that captured the huge CS that the clients' products generated. But he kept reminding them that the relevant CS was not estimated by comparing the clients' products with the absence of any such products but by comparing the clients' products with the existing products and prices already out there. So the CS was generated by improvements that the clients had made that made their products better than the competitors'.
Finally, headache at Pentagon. LOL.

Joe Smith writes:

The main reason for that progress [in the 20th Century] is a high degree of economic freedom. But we're losing that freedom. Let's not.

Economic freedom was important in the 20th Century but the two truly important advances were mass produced steel (invented circa 1865) and electrification ( practical in the 1880s). Most of the progress of the 20th century was the result of fully exploiting those two advances from the prior century. Throw in industrial chemistry which started in the 1800s and you get another big slice of 20th century progress. Add electronics and you have accounted for all of the economic progress of the 20th Century.

That microwave you so appreciate: Maxwell's equations from the 1860s combined with the cavity magnetron developed under government contracts for wartime use gave rise to the "Radarange".

Taken as a whole there is probably more real economic freedom in the United States now than at any time anywhere. Progress in the West has not slowed down as a result of a lack of economic freedom - it has slowed down because we have run out of 19th century scientific discoveries to further exploit. The low hanging fruit is gone.

Miles Stevenson writes:

David, I enjoyed the article, thank you. I have a question about the last bit though:

Economic progress in the 20th century makes 19th-century progress look trivial by comparison. The main reason for that progress is a high degree of economic freedom.

Most of the economic history that I have read, suggests that, at least in the United States, there was more economic freedom in the 19th century than the 20th. The lack of a central bank, significantly less regulation, and lower tax rates seem to coincide with this. Why would you say that the 20th century was more economically free than the 19th?

Thanks.

David R. Henderson writes:

@Mike Stevenson,
You're welcome.
I agree with you that, once slavery was eliminated, the late 19th century had more economic freedom than almost the whole of the 20th century. I didn't mean to imply anything different. Sorry for the misunderstanding.
I attribute most of our economic progress to economic freedom. That was all I meant by the last part of my article.

Joe Smith writes:

David

I agree that economic freedom was and is important to progress but you go further when you say that we are losing that freedom. You do not specify how you think we are losing our freedoms. My subjective view is that over my life, I have had much more effective economic freedom than my father or grandfathers had. Reducing economic freedom for the top 0.1% while increasing real economic freedom for everyone else can result in an overall increase in economic freedom.

One of the key drivers of western economic progress has been effective legal systems which provide frameworks within which economic freedoms are realized and which make markets more efficient. Bank de-regulation a decade ago may have increased economic freedom at the cost of making the banking system less effective.

Joe Cushing writes:

Less than $100 a month for water? What do you do, run a car was side business at your home in the desert? For $156 a month I get water, structure insurance, lawn maintenance, outdoor lighting, driveway maintenance, snow plowing, and minor repairs to the exterior of my condo. I probably pay $20 a month or less for water.

michael pettengill writes:

Penicillin was named by Fleming after he and his team at a UK public institution noted its antibacterial properties and tried to refine the active agent. Others at UK public institutions refined it further and demonstrated its potential for treating infections. As part of the war effort, work was expanded to produce it in volume. Heatley, the inventor and innovator who did most of the work of producing it, worked with AJ Moyer in Peoria, IL to mass produce it. While all work and credit was to be shared, AJ Moyer kept his ideas and progress to himself and later published their work under his name, and then obtained patents for their inventions under his name.

The support for developing the mass production was provided by FDRs War Production Board, and the work done at the Dept of Ag lab.

A decade elapsed between the publishing of the first papers on the potential of penicillin, but all subsequent work was publicly funded until after WWII when it moved from government production into the commercial market.

Should this be taken as evidence that tax and spend on R&D and central planning on products needed for war is "economic freedom"?

Or is economic freedom providing the means for individuals to work on interesting things for pure knowledge or to solve big problems for the greater good?

Is the declining public support for work like that for penicillin the reason for loss of economic freedom?

Tracy W writes:

I remember a hiking trip in a NZ mountain range. On day 4 we came to the hut where we were staying the night, and it had a sink! No running water, just the sink. But no more washing dishes in the billy we'd cooked dinner in = luxury!

Although when it comes to feeding babies in the middle of the night, gosh your story, even with the microwave, makes me so glad that the even older technology of breastfeeding worked out for me. Grab baby, shove baby on, fall back asleep.

David R. Henderson writes:

@Joe Cushing,
Less than $100 a month for water? What do you do, run a car was side business at your home in the desert? For $156 a month I get water, structure insurance, lawn maintenance, outdoor lighting, driveway maintenance, snow plowing, and minor repairs to the exterior of my condo. I probably pay $20 a month or less for water.
Two responses:
1. $20 is less than $100.
2. What do I do? I live on the Monterey Peninsula where the anti-growthers have prevented a new dam from being built for the last 30 years.

David R. Henderson writes:

@michael pettengill,
Thanks for that useful information.
I had a word constraint and so I handled your point in the article with this paragraph:
Antibiotics were not initially developed by a profit-seeking entrepreneur. However, they were mass-produced and brought to market by many profit-seeking drug companies. The economic freedom story is not totally clean: Patents, a government-granted monopoly, were part of the reason the drugs were invented. Still, people were free to start and invest in drug companies to produce those valuable items.

jure writes:

hm, david- but why really was progress in 20th century higher than in previous century? 19.century was by far the most libertarian century in history of mankind. First half of the 20.th century is nothing else than a huge psychological and intellectual reaction to the previous libertarian-capitalist era. It's a century full of wars and governments. Now, keynesians would say that precisely because of this- growth was higher. And welfarists would say that safer environment for people made by government breeds better capitalism.
i think that progress went on despite all those calamities. That's what friedman said to a protectionist in a debate on free to choose series, but it doesnt sound persuasive. It might be that some major discoveries in science and technology made growth of additional discoveries exponentially faster? Cause on the surface, 20th century seems a case for keynesians not libertarians.

john hare writes:

My first microwave cost over $300.00 when I was working for ~$3.00/hr. That would be a $49.00 sandwich warmer tech microwave now when I am earning several times as much. The one I am actually using now cost $7.00 at a yard sale a year or so back and it is far advanced beyond my first one. CS factor well over 100/1.

The new trucks in 1980 at ~$5,500.00 were half ton 2wd with a 6 cylinder engine and 3 speed on the column. At 100,000 miles, it was past time to move on. Now I am buying GMC or Chevy 3500 4wd with automatic and cruise control used for half that with 100,000 or more miles to go before wearing out. Considering that I load and pull heavy now and just commuted then, I'm getting at least 4 times the truck for about 10-15% of the inflation adjusted cost. CS factor 30-40/1

I lost a good customer because he couldn't reach me about a problem before I had a cell phone. Other times I lost hours or even days due to scheduling problems that a 30 second phone call could handle. Since I considered $300.00-$400.00 a month to be well worth it for my first cell phone, the $70.00 a month now is a real bargain. Allowing for inflation, about a 12/1 CS factor even before thinking of portability, caller ID, multiple lines and so on. True CS factor from 1992 is about 20/1+ and triple that from 5 years before that.

Computers and internet triple and possibly quadruple digit CS ratios for my needs compared to previous information availability.

Fast food and convenience stores have excellent CS ratios when you really need them, though it would be hard to figure an exact ratio.

David R. Henderson writes:

@john hare,
Nicely done. Thanks.

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