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Tuesday, December 18, 2012

Life Without a Microwave

Last week, my family’s microwave broke down after 15 years of faithful service. That incident might sound trivial to you. I’m sure it is trivial to you. But it made me aware of how valuable a microwave has been to us. And our week without a microwave taught me a lot about the value of microwaves—and can teach us more generally about the value of economic freedom.

Consider first the value of a microwave. The first thing I do every morning, after feeding the cats and cleaning their litter, is to brew a strong cup of coffee to which I add a little milk and a dollop of whipped cream. Sometimes I add a little too much milk and my coffee isn’t quite hot enough. So I put it in the microwave for about 20 seconds and voilà! I have coffee that’s the right temperature. As I drink it slowly, I work on the local paper’s crossword puzzle. Sometimes, I nurse my drink and, therefore, 15 minutes later I need to zap it in the microwave again.  

But since the microwave broke down, I’ve had to change my approach. I pour less milk in and use less whipped cream because I don’t want to get the coffee too cold. I find myself drinking my coffee faster than usual because, when it does cool too much, I don’t enjoy it as much.
And think about leftovers. My wife and I, who are both busy, get takeout food at least once a week and usually have leftovers. Without a microwave to heat them up, they’re not nearly as tasty. 
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. 

The Joy of Consumer Surplus

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.
Here’s an enlightening exercise: Start looking at the items you own, try to remember what you paid for them, and then think about their roles in your life. Once you’ve thought about how they have enhanced your life, ask yourself the maximum amount you would have been willing to pay for them. One obvious item to start with is a smart phone. I would bet your consumer surplus, even after subtracting monthly charges, is at least $1,000 a year. 
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 remember 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.

Richer Than Rothschild

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.
And to what do we owe all this progress? Relative economic freedom. Why was I able to buy a microwave in 1985 for about $150? And why can I buy an even better one today that, adjusted for inflation, is even less expensive? Because people exercised their freedom to improve upon the microwave at various stages of design and production. Other people added to those improvements and brought the cost lower and lower through improved manufacturing, better logistics, and greater economies of scale. Competition among microwave producers and retailers brings consumer surplus to us.
Why can we buy a phone that, besides being better than Dick Tracy’s fictional wristwatch, is a more powerful computer than the most powerful laptop available just 15 years ago? Because Steve Jobs at Apple and other talented entrepreneurs out to make not just a buck, but a lot of bucks, figured out ways to make our smart phones better and better. Through competition, those phones became a bargain.
It’s true that running water is often provided by government agencies or by private, regulated monopolies. But that’s not a necessary feature of running water. One can certainly conceive of unregulated water companies bringing us water. And the people who install our indoor plumbing are typically private contractors competing with each other. To the extent they are not competitive, it is mainly because of governments’ requirements that they be licensed. Without those licensing requirements, indoor plumbing would be even cheaper. There would be more consumer surplus and more resources to use for other things we value.
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.

Marx was a Piker

It may surprise those who have never read him, but Karl Marx noted the huge gains from economic freedom in the 19th century. He wrote:
[D]uring its rule [sic] of scarce one hundred years . . . [the bourgeoisie] created more massive and more colossal productive forces than have all preceding generations together. The subjection of nature's forces to man, machinery, the application of chemistry to industry and agriculture, steam-navigation, the railways, electric telegraphs, the clearing of entire continents for cultivation, the canalization of rivers, the conjuring of entire populations out of the ground.
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.

  • David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at