The Market Fails
1. Any government intervention means the market has failed. Listening to right-wing and left-wing discussions about small versus big government, one can get the impression that either the free market represents the natural world and government is some sort of parasite, or government (in the form of society) represents the natural world and the capitalist market is some sort of parasite.
Above is a picture of a fire insurance medallion (or “firemark”). This is from a time when public fire brigades were either non-existent or completely inadequate and people who were worried about fires had to purchase fire protection from the private sector. They would put these medallions on the front of their buildings so that the private firemen could identify them as a customer. The fire protection the private sector provided was good for the time, but the free market ultimately failed to provide the kind of fire protection that we have now come to expect in this society. This failure was not because the government somehow stood in the way of the free market. It was that there was no reason why the private sector should be able to meet the need of universal fire protection for both those who could buy it privately and those who could not. The police be organized in a similar manner and the military also used to exist in this way at the time in Western history when national armies were made up entirely of mercenaries. I point this out to remind us that the government has always intervened when the market fails and if it looks like some “small government” functions like police, fire, and military protection seen “natural”, it’s because the government has been intervening in them for so long that we have forgotten why the government intervened in the first place. The market has always failed whenever resources were needed by those who can’t enter the market or when capital costs were too high for private holders of capital to combine themselves. The distinction between a free market on one hand and the government on the other is a false one.
2. The definition of “market failure” is always a moral one. Government intervention in any form, from the building of an army to corporate welfare, always involves the movement of resources from one group to another by the government in a way that the market cannot. This always involves the question of desserts. Do those with the resources deserve to lose them and those without deserve to get them? It is the definition of market failure that changes over time, as society comes to decide that the market will not provide a service in the form that society needs it. Health care in America is a case in point. The health care market provides very well for a few, well for some, and hardly at all for others. In these terms, since the people who get healthcare get it to the degree they can pay for it, the market does what it does well. On the other hand, the free market cannot provide insurance benefits for everyone, and since the universal provision of these benefits has become a social value, the market has been deemed a failure and the government now has to intervene. The same market had the same situation with the masses of uninsured in the past. It’s just that in the past we did not see this as a market failure in the way that we do now. The definition of market failure, whether it refers to a need to have a standing army, a public provision of police and fire protection, Social Security, Medicare, sugar and ethanol subsidies, or universal health insurance is always a social construct around a moral debate.
3. The government always intervenes as an entrepreneur. From a capitalist point of view, the reason that the government can intervene in the market in the first place is because it has access to capital resources that are not available to the private sector. Some people claim that the private sector does things well and the public sector does things poorly and that there is some sort of intrinsic reason for this. This is a strange argument to make. The public sector only gets involved in the first place when the private sector has already failed. When the government gets involved to rectify this, it too can fail or it can succeed like any entrepreneur. Sometimes, like an entrepreneur, it succeeds at first and then later fails as it fails to adapt to changing circumstances. But the government always enters the market as an entrepreneur when private entrepreneurs have failed.
The point of all of this is that the right-wing “market good – government bad” and the left-wing “government good – market bad” positions are not really arguments at all. They are a-priori assertions that when used causes discussion to stop. When we talk about things like cutting military spending, Medicare, Social Security, public services, etc. we are talking about cases where the market already failed in the past and we are talking about the definition of this market failure in each case, which is a moral discussion.
The market will always provide some level of service. Always. But the free market is not itself a source of social or moral values. It does well what we decide it does well and fails where we decide it fails.
Have a happy Independence Day.
Whatever one thinks about government vs. the free market, we should remember just where those expert government bureaucrats come from and what their own personal preferences are.
Today’s government saviors were the Evil Big Business fat cats yesterday. It is the corporate tycoons and Wall Street guys who are appointed to the government economic positions. And as we saw with TARP, other corporate welfare (bailouts), and the two ineffectual “stimulus” spending sprees, their main priority was to protect their business buddies.
The government bureaucrats are invariably either fat cats themselves, or they are academic types who never ran a business themselves, but are all too eager to treat the multi-trillion dollar economy as their own personal plaything by which to implement their own partisan ideological preferences.
The lesson to be learned is that one should not hand over his personal economic well-being to Tim Geithner, et al.
The problem – and it is a problem – is that both governments and businesses tend to grow so large that they become powers in themselves. Governments should always be the servants of the people, not their masters. Businesses should never be allowed to grow so powerful that they become, in effect, governments in themselves or co-conspirators against the people with too-large governments.
Size is an essential problem, right up there with effectiveness and efficiency. If you don’t take that into account as you go along solving problems, you’re likely to effectively turn your democracy into an authoritarian thing owned and controlled by a few people with agendas of their own, unaccountable to the people. Size is not a byproduct, not a secondary problem: it’s a first-order problem that needs always to be carefully managed.
Unagidon, can you imagine the possibility that the government might fail at something it’s now taken for granted it’s naturally fitted for and for which the private sector would subsequently be discovered to be far better suited?
What are these three statements? laws of social science? religious beliefs? empirical generalizations? Tendencies? Definitions?
Take the first one: “Any government intervention means the market has failed.”
With all due respect, the untold millions of innocent victims of Lenin, Stalin and Mao and all the other despots from the beginning of ancient times would hardly be comforted by such cockamamie blather. Or do you recognize possible exceptions to your grand pronouncements?
“With all due respect, the untold millions of innocent victims of Lenin, Stalin and Mao and all the other despots from the beginning of ancient times would hardly be comforted by such cockamamie blather. Or do you recognize possible exceptions to your grand pronouncements?”
The whole edifice of Communism was built on the idea that the capitalist market would fail to provide for the needs of society as a whole. It was a rejection of the market as such. And you’ll notice that all of these regimes arose out of world wars, which itself is a massive failure of the market. But it is the leftist side of the government bad – market good coin to say what these people said, basically government good – market bad. And you can see that all of these societies have rejected the idea that the market is bad as such.
“Unagidon, can you imagine the possibility that the government might fail at something it’s now taken for granted it’s naturally fitted for and for which the private sector would subsequently be discovered to be far better suited?”
Yes, and it happens all the time. Sometimes the government is the only source of capital at some earlier phase of its history, so it has to bankroll basic economic development. When the economy becomes more developed, the government no longer has to play this role.
On the other hand, if you are referring to things like Social Security, there are private sector “solutions” like privatization that don’t do away with the basic risk of market failure, like the stock market crash that we have just gone through. Privatization looks like it would solve a short term solvency problem better than the current taxation system does, but it leaves the long term problem (which was one of the original problems that Social Security was designed to deal with) of having a social insurance system that would not be dependent on things like the stock market.
“The problem – and it is a problem – is that both governments and businesses tend to grow so large that they become powers in themselves. Governments should always be the servants of the people, not their masters. Businesses should never be allowed to grow so powerful that they become, in effect, governments in themselves or co-conspirators against the people with too-large governments.”
This is the market failure known as monopoly. Unfortunately, only the government is a large enough player to break up private monopolies.
As for the size of the government, when size as such is taken as a political issue I have never been sure what that is supposed to mean. A government such as ours with the largest military force in history will never be “small” by any definition. It seems to me that “large” is a relative expression of whether people think they are really in control of the government or not. But talking about small government, low taxes, and things like that as though these things themselves are “principles” doesn’t seem to me to address what the government is doing, or can do.
“Today’s government saviors were the Evil Big Business fat cats yesterday. It is the corporate tycoons and Wall Street guys who are appointed to the government economic positions. And as we saw with TARP, other corporate welfare (bailouts), and the two ineffectual “stimulus” spending sprees, their main priority was to protect their business buddies.”
You make a good point in that the government draws from precisely the same people that business does; same schools, same backgrounds, and physically often the very same people who cycle between business and government and back again. So when people say that government somehow always lacks the know-how of the private sector, they are not usually making sense.
Yes, the government is going to protect the main holders of property. Any government is going to do this. I have never gotten it when people on the right and the left talk like it is strange that the largest capitalist empire with the most powerful army in history should have some kind of government like we were a rural 18th century backwater. Our political possibilities, especially in the short term, are based upon who we are now. This government of ours is built on a gigantic economic and military infrastructure and the government and the infrastructure grew up together. I don’t see how the government can be rolled back to something simpler without also rolling back the infrastructure or economic and military power. We won’t have a small government sitting on top of a giant economy, not because we don’t want to but because we simply can’t.
The last socialist is the Old Man in Havana who nobody including his brother listens too. But anytime the subject of economics is brought up the ‘usual suspects’ post their commie 1950s bogey man ideas. They tout that the Government stinks, all regs are bad, the government fails but they are hard put to explain how the Chinese went from starving famines in my lifetime to holding our debt and having trains that go three times as fast as ours. The commie bogey man is dead.. get over it. Tell us again Daddy, how the repatriating tax free, the trillions of dollars of overseas profits will create jobs..and not go to lavish dividends and exec. salaries. Their Answer is; they will create jobs because these corps. love the working class, are patriotic, want to close all their overseas tax shelters and are motivated by Christan social justice ideas. No? maybe it’s that the Secret Market forces that have been endowed by the Creator into both human nature and are embedded in the Cosmos will bring the economy back.???
“They tout that the Government stinks, all regs are bad, the government fails but they are hard put to explain how the Chinese went from starving famines in my lifetime to holding our debt and having trains that go three times as fast as ours.”
Right, Ed. I too remember the starving Chinese babies. I even remember pictures of them in a magazine that my mother thought she had thrown away in a place I wouldn’t see them. Horrible.
Now the conservatives will say that it was the adoption of capitalistic principles that has caused China’s prospering, and the liberals will say that it’s the continued government planning and assistance to the capitalists. As I see it, the flourishing of China is due to the Chinese doing what was needed at the moment — some but only some over-all planning and some huge projects plus the allowing, even encouragement of capitalist activities. The *combination* is what is needed now, and the Chinese have been wise enough not to be doctrinaire about their old allegiance to Lenin and Mao.
As I see it, for an economic system to flourish the decision makers must not be doctrinaire about one theory over an other. Different circumstances call for different actions. Conservatives in particular seem to have trouble with that principle. For them it’s Adam Smith and Reagan all the way and nothing else, even when a recession calls for Keynesian government spending. Yes, that’s counter-intuitive, but only when you don’t think any further than tomorrow.
Government bureaucrats are either corrupt “fat cats” or ignorant “academic types”? Is there any evidence for this?
Of course it is always possible to label someone with a business background a “fat cat” if you don’t like his or her policies. Likewise, “academic types” whose policies one doesn’t like are ipso facto lacking in the knowledge and experience necessary to run a business, although in truth most high level academics have had considerable experience of that sort. Exactly what is, one wonders, the correct background for government service?
I’ve just run through a dozen major government officials in mind — Robert Gates, Leon Panetta, Larry Summers, Condoleezza Rice, Arne Duncan, Kathleen Sebelius, General Petraeus, Ray LaHood, Ken Salazar, Hillary Clinton, Richard Holbrooke, George Mitchell. Some of their policies I applauded, some I opposed, some I even hated. But to put these people down as “fat cats” or “academic types.” is simple-minded.
During the years I spent in the fledgling field of bioethics, I met a number of people at lower but still pretty influential levels in public health, social welfare agencies, and congressional offices. They were career government workers. Their knowledge and dedication were extraordinary. If we demean all such professionals as corrupt or dumb, we will simply assure that the only people left in government service are the ones who don’t give a damn about that kind of characterization, namely the corrupt and the dumb.
Regarding #1: I do agree that the free market can leave millions of people without necessary goods and services. I’d think that anyone who is involved in a social outreach ministry has seen that the free market has failed to provide housing that the very poor can afford (why can’t a general contractor start a business to build cheap homes or apartments?); anyone with a family member with a serious mental illness has seen that the free market has failed to provide mental health services that the poor can afford (bitterly ironic in that mental illness is one of the primary causes of poverty); many poor people can’t afford to pay for electricity, water service, and telephone service, which are necessities for life these days. Many other examples are readily at hand.
From #2: “On the other hand, the free market cannot provide insurance benefits for everyone, and since the universal provision of these benefits has become a social value, the market has been deemed a failure and the government now has to intervene.”
I believe you need to qualify your statement, as follows: “the market has been deemed a failure *for the market segments unserved or underserved by the insurance market*, and the government now has to intervene *for those unserved/underserved segments*.” For the segments of the market that are more or less satisfied with what the market provides, there has been no market failure.
I’m suggesting my qualifiers for a couple of reasons (in addition to their improved accuracy): (1) the federal government’s solution to the heath insurance market segment failure, the Affordable Care Act, purports to take this segment-specific approach (the President has promised that those who are happy with their current insurance arrangement won’t have to change anything); and (2) despite the fact that the market seems to be functioning (not failing) for half or more of Americans, there are many progressives who would like to deconstruct the market mechanism even for the segments where the market hasn’t failed, and impose a government solution even for those segments – i.e. the so-called single-payer option.
The latter point would seem to illustrate what Patrick Molloy stated above: that it is by no means a law of nature that government steps in *only* when the market has failed. Governments are more responsive to political stimuli than market stimuli. Governments will do whatever politicians have them do. If politicians don’t respect a well-functioning market, then government may do things that subvert that market. Cf tariffs and price controls.
One more thought on government’s intervention in situations of market failure: by no means is it a foregone conclusion that the government program intended to fill the hole in the market will solve the problem or be free of unintended consequences. In the instance of the Affordable Care Act, it is not certain that whatever coverage is offered to the currently uninsured will be affordable; nor that those who currently choose to be uninsured will obey the new law’s requirement that they buy insurance; nor that the government-sponsored insurance exchanges will function as intended (or at all). I don’t think any of these are sufficient reasons to not pursue government-provided solutions to these social problems, but we should recognize that government-provided solutions can also bring problems and risks.
My own view is that the government should be the last resort. It’s always better to try to find ways to get the market to function more effectively before we resort to a government program. Ironically, government itself can be a reason for ineffective market functioning (as when tax breaks, regulations or other government interventions cause market distortions), and in those cases, the solution to the social problem may actually be less government.
Jim, you keep mentioning that the Government.[I assume you mean the feds.] ought to be the last resort. For what???Policing, disasters, prisons, FBI, Border patrol, marines, foreign policy and execution, Judicial functions, making laws, National parks, food safety, taxation law enforcement, Bank insurance, Printing money and coins, Secret Service, Veteran care and etc etc etc .. I would guess you really don’t mean any of the above do you?
That leaves You and the TP left to bitch how the Post Office and health care for the employed should be privatized along with unemployment insurance. With these extreme views ,You and the GOP/TP will lose…
Ed, you’re asking what the proper role of government should be. Good question. Should it do everything? Nothing? If neither of those, then what?
For example, should the US federal government enforce laws permitting slavery? Abortion? Internment of Japanese-American citizens? If not, then why not?
Should the US federal government continue to enforce laws against cultivating and consuming marijuana, when certain state laws permit it? If so, why?
Should the US federal government purchase and resell home mortgages? If so, why?
Jim, I’m not asking what the proper role of government is.. I’m objecting to people who think their short sighted ideology should be the rule of the day. you say “Should the US federal government purchase and resell home mortgages? If so, why?
Why don’t you ask why Michelle Bachmann types get farm subsidies and Medicaid payments? Do you get any government payments?
this privatizing stuff started with George Bush’s minions who hired private gunnies as contractors. They did not find Hussein or Osama . There were thousands of these privateers paid 10k a month. the only ones who liked them were Afghan and Iraqi bosses who could not trust their own people. Still there too..
In 1770s The Brits hired privateers and German mercenaries and they lost too. So I ask you why do the GOP/TP types love this privatizing baloney when the foundering fathers kicked a– on the mercenaries. A well run democracy is a great place to live.. the mean-spirited rhetoric we hear from the GOP/TP is maddening the day after July 4th.
I do think the GOP/TP will refuse the debt limit extension in traitorous belief this will help their election chances in 2012.
Hi, Ed, I don’t like all the mercenaries, either. My view is, serving our country in the military is a duty, and a draft may be necessary if volunteers don’t provide the necessary manpower. In my opinion, if the draft were in play in these post-Vietnam days, we never would have invaded Iraq, and certainly would not be in Libya, Yemen, Pakistan and wherever else we supposedly aren’t but really are.
Jim (5:12 pm) writes:
This is a little off to the side of what Jim’s talking about, but it touches on it in important ways.
My sense is that most people would prefer, as a general governing principle, that higher levels of government do only what lower levels can’t, on the principle of subsidiarity. The smaller the government, the closer it is to the people, the more aware of their feelings and desires; conversely, the larger and more powerful the government, the more detached from the people it is, and the more impersonal. The single reason why government exists is to carry out the will of the people. If it is to hear them and engage them in dialogue, it has to be be able to hear them directly, not just through the intermediation of groups so large that they, themselves, don’t have a clear sense of what individuals want.
The largest and most powerful of these intermediary groups that stand between individuals and their governments and hinder or distort communication between them is the political party. Perhaps as the internet and other methods of interpersonal communication mature – become more sophisticated, flexible, and reliable – political parties will disappear or at least greatly diminish in importance. We seem to be moving in that direction now, with many or most candidates for office being chosen essentially by personal popularity, rather than simply because they belong to one large party or another.
David, Why not ask the poor people of Bell Ca. that paid the Mayor, chief of police et al over half a million in salary and pensions if they love as you say ” The smaller the government, the closer it is to the people”. these poor people were robbed by a small government. look it up.
This small is good has a mixed standing. The Vatican won’t even let a national bishop conference pick a holiday picnic, a translation, and even it’s own people. Go stuff it with this worship of let’s leave it to the locals rhetoric. . .. go figure. If you and others want to govern with rhetoric do it someplace else. p.s Political parties died about 3 decades ago… The obits were in all the papers you must have missed them. ..
Ed, political parties are the gatekeepers to elective office. Nobody thinks in the black-and-white terms in which they speak, but they still have the last word about who can be elected. They may be relics, but they’re far from dead.
“The smaller the government, the closer it is to the people, the more aware of their feelings and desires; conversely, the larger and more powerful the government, the more detached from the people it is, and the more impersonal.”
David S. –
I don’t see how detachment necessarily follows size. Information theory tells us that the more complex a system the more likely it is to break down. But complexity is not the same thing as size.
Consider the Social Security administration. It has a relatively simple organization but it’s larger in the number of elements (people) covered than the military, which has a more complex structure, but it includes fewer elements. Both are extremely costly.
Then there are the meta-structures — the executive branch which coordinates the various sub-structures, and the legislative branch which is itself extremely complex. The Supreme Court, of course, is relatively very, very simple. Or would you prefer that there be only three justices?
I just don’t think you can generalize about the merits of complexity quite so easily.
Ann writes (7:05 11:15 pm):
Ann, I thought it was pretty much self-evident that if a government had 300,000,000 people to be responsible to, each person would be pretty much a number – not even a name. And that if it had only, say, 300,000, it would likely be a lot closer to the individuals. How is that not likely to be true? Aren’t you much more likely to get to speak with the mayor than with the president?
I was thinking only of size – not complexity. I suppose a small organization could be more complex than a large one, but that seems to me, on the face of it, to be unlikely. Complexity is a natural response to size, no?
The simplicity of the Social Security Administration is due to its inherent simplicity – one head office and lots of little satellite offices. The complexity of the military is due to its inherent complexity – many different functions in few fixed locations.
David S. –
I can’t imagine “feeling close” to 300,000 people either. I don’t *want* to be close to 300,000 people. The only question with government should be: is the communication system efficient enough to answer my questions or respond in some other appropriate way.
Complexity in government, like anything else, does have to be determined by the nature of the enterprise. The question is: must the government do complex things? My answer is; which complex things?
In other words, I don’t give a hoot whether the government is complex or simple, large or small. I just care whether it does what it ought to do as efficiently and fairly as it can. And I expect to *pay* for quality. This issue of largeness is a red herring. Some government agencies have to be large and complex, others small and simple, etc. And if they have to be large and complex, well, we’re supposed to be such clever, practical people, we can surely figure out how to do it. What I have at the moment is a health care system that works for everyone, and, dammit, if Cuba can take care of the poor, so can we. I”m sick of all these gainsayers with ambitions about as high as curb.
Oops — should be: what I have in mind at the moment is a health care system that works for everyone. . .
and: I’m sick of all these gainsayers with ambitions about as high as a curb.
Ann (07/06 1:10 am):
Ann, we do have a health-care system that works for nearly everyone. It’s just terribly costly and absurdly complicated for the consumer. I’m inclined to think that payment for health care is one of those things that we’d be better off having centralized, somehow, at a national level, but there is not a national consensus about that, and since this is a democracy, we have either to come to a compromise acceptable to much more than a bare majority of voters or simply to continue to tinker with what we have.
There’s no doubt, I think, about the quality of the care we have now; the problem is in bringing the average cost of it down to earth and streamlining the billing. While I think a single-payer system is a lovely idea, there are many devils waiting in the wings to play havoc among the details. We want to be sure not to damage the quality of care we have while trying to regularize the cost. Baby and bathwater.
I realize, of course, that, as we hear constantly, other countries have come up with relatively cheap and workable systems, but other countries are not this country. London and Berlin are not Washington. Big difference in size, in traditions, in economy, in cultural diversity. Better for us, I think, to flounder for a while, so long as we’re actively trying to improve the payment system, than to rush in and implement the prefabricated solution of a few people against the will of a great many people.
Health-care cost control is something, I think, that has far too many critical moving parts to be amenable to a simple imposed political solution. Far better for all the players to get together in the open and work out a good solution – over a generous period of time – than to have politicians heavy-handedly impose a back-room sausage-grinder solution before one or another congressional recess.
“Ann, we do have a health-care system that works for nearly everyone. It’s just terribly costly and absurdly complicated for the consumer. I’m inclined to think that payment for health care is one of those things that we’d be better off having centralized, somehow, at a national level, but there is not a national consensus about that, and since this is a democracy, we have either to come to a compromise acceptable to much more than a bare majority of voters or simply to continue to tinker with what we have.”
It’s probably more of a rule of thumb than anything, but when the Federal government become involved in something the market can’t seem to be able to do, we should consider that the market may have failed in a big way that affects a number of constituencies.
The health care market is failing as a whole (and I speak from within the insurance industry). It is easy enough for the general public to see the tens of million uninsured. We have reached a point now where everyone south of the upper middle class knows someone who has lost, perhaps permanently, their insurance benefits. But despite what some thing about “liberals” and their intentions, I don’t think that we would have ever seen Federal level insurance legislation on the level of the Health Care Reform just because there are a lot of uninsured Americans. Part of this depends on what kind of uninsured Americans we are talking about and part of this depends on the fact that the uninsured are not the only critical problem.
The health care market has failed for business, because costs are out of control. Costs are out of control in the sense that medical costs year over year are far outpacing the general cost of living. Since many are uninsured and under-insured, and since commercial payers (those with insurance from the workplace) subsidize the rest of the system, real health care costs are rising faster than even the official health care cost of living would show. Business would like to get out of the health care business altogether and I would argue that it is the business impetus rather than the uninsured that is fueling the current Federal intervention, however “socialistic” the reforms are portrayed on the Right. For business to get out of the health benefits business completely, some national, Federal movement is required. After all, those of us with commercial insurance look upon this as a just part of our compensation. We don’t think of it as a frill. For business to get out of the insurance business, the workers need someplace else to go.
The health care market is also failing the doctors and hospitals. Earlier market failures led to national, but piecemeal patches like certain mandated benefits and the rules that say that the emergency room can’t (really) turn people away. (Without these, people would be dying in the streets, like we were living in Calcutta; I mentioned in the main post that market failure is socially defined. At a certain point we decided that having people die in the streets was not something we were prepared to tolerate as a society.)
The funding for all of this stuff was equally piecemeal and inadequate and what happened was that it was eventually subsidized by commercial insurers. Now prices are rising in general (for lots of reasons) and the doctors and hospitals are squeezed between Medicare and Medicaid reimbursements that may not be adequate or timely, and commercial insurers that don’t want to indefinitely raise the levels of the subsidy.
So it’s a three pronged failure affecting business, the provider, and the consumer that is driving these attempts to find a national solution. The mishmash we see in the law is the result of different interest groups trying to solve their market failure problem at the expense of the other interest groups. Business would happily pay a tax to get out of the insurance business for example; they just don’t want to pay a tax that will go up every year like their current insurance rates are. So business doesn’t want to subsidize the uninsured. The providers of health care would be happy to have a national single payer insurance. But they don’t want their reimbursements capped through some kind of universal payment scheme like Medicare, because they would lose that nice commercial subsidy. The public is a bit more complicated in that some would like to see insurance become universal and some would not; after all, if health benefits are a form of compensation, why should the uninsured and especially the poor be compensated? What are they doing to be compensated for?
I will go back to my original point and say that any kind of government intervention springs from a market failure. But in a society divided into people with opposed interests (I hesitate to use the word classes) it will look like the market has failed for some and not (in the same way) for others and so the political solution causing the government intervention can seem incoherent.
“So it’s a three pronged failure affecting business, the provider, and the consumer that is driving these attempts to find a national solution. The mishmash we see in the law is the result of different interest groups trying to solve their market failure problem at the expense of the other interest groups. Business would happily pay a tax to get out of the insurance business for example; they just don’t want to pay a tax that will go up every year like their current insurance rates are. So business doesn’t want to subsidize the uninsured. The providers of health care would be happy to have a national single payer insurance. But they don’t want their reimbursements capped through some kind of universal payment scheme like Medicare, because they would lose that nice commercial subsidy. The public is a bit more complicated in that some would like to see insurance become universal and some would not; after all, if health benefits are a form of compensation, why should the uninsured and especially the poor be compensated? What are they doing to be compensated for?”
Hi, Unagidon, thanks for your analysis. I agree with it. Your schema of competing interest groups rings true. Politics has one way of balancing competing interests; the market has another way of doing so. When the market is well-functioning, it is superior to politics. When the market isn’t well-functioning, and/or when it fails to serve a segment that needs its services, then something else has to be tried, and that something else generally turns out to be government.
Here is a conversation I’ve had with my wife, not about health care, but public education (another area that features huge and inequitable disparities of resources and outcomes): “I would be in favor of a restructuring of the system that would bring the underperforming school districts up to the level of the high-performing districts. I would not be in favor of a solution that would relevel such that the have-nots would be better off but the haves would be worse off.”
I mention this because I think it describes the fears that many Americans have about a government-run health system. Anyone who has sat for hours in the emergency room of a county hospital, or has waited for their number to be called at a public health clinic, has seen what publicly funded medicine looks like today. If that is the outcome of the government’s assumption of the health care system – lowest-common-denominator health care – then it is destined to be wildly unpopular – in fact, a political failure. And once the market has failed and the government has failed … then what?
unagidon (07/06/2011 – 8:50 am):
If all cars cost as much as a BMW, few people would drive cars. Therefore, the market supplies perfectly good affordable cars. Win, win. What prevents the market from providing affordable health care?
“If all cars cost as much as a BMW, few people would drive cars. Therefore, the market supplies perfectly good affordable cars. Win, win. What prevents the market from providing affordable health care?”
These are the reasons:
1. Health care is not a typical commodity
In order for any market to exist, there has to be both price and quality transparency. Neither really exists in the health care market. You don’t necessarily know how much something is going to cost you before you go to the hospital. And you don’t necessarily know who the best hospitals or doctors are (and who the worst are). Part of this is because of the complexity of medical care. But part of this is because the AMA and the providers don’t want to put this information out there. You can find a consumer report on your Mercedes compared to all kinds of other cars. You won’t find the same thing for a doctor or a hospital. (There is some information scattered out there if you really look for it. But not like for most other high ticket commodities).
2. There is no market defined minimum.
In your automobile example, there is a range of options from (let’s say) a Yugo to a Mercedes and people can opt out of buying a car altogether and just take the bus or walk. With health care, we don’t quite have the same kind of understanding of what constitutes the minimum. We won’t as a society (at this point) say that some people are just going to have to walk. We think that there should be some kind of health care available to all, even if it is just on an emergency basis. Once we have hit this point, we are not talking about a free market in the sense that we have one for cars. Now we are talking about spreading risk throughout society. Health care is seen as a matter of life and death. Having a car is not. (It may be that you need a car in order to work. But you can move to a place where you don’t need a car in order to work. You can’t move to a place where you don’t need health care.) If the “Mercedes” level health plan looks like it’s full of just frills, like a private room in a hospital, that’s one thing. If it looks like the owner of a Mercedes level plan gets to live and the holder of a Yugo level plan does not, that’s a different sort of problem. Again, in a society that thinks that everyone should have access to medical care but where we don’t believe (in general) that some people deserve minimal (in the sense of sub-standard) care and where we have not, in fact, even defined a minimal level of care, we are not going to long tolerate a commoditized system where some people get Mercedes and some people just get Yugos.
3. It is never the market’s role to provide affordable anything to everyone.
The market is never going to provide things for people who don’t have any money. Why should it? The concept of affordable, in the sense that you use it, is not a market concept. It’s a social concept. As you say, the market is currently providing health care at a price that people with money are (for the time being) willing to tolerate. So by this definition, the market is working. It’s just that we no longer want to tolerate this definition.
“I would be in favor of a restructuring of the system that would bring the underperforming school districts up to the level of the high-performing districts. I would not be in favor of a solution that would relevel such that the have-nots would be better off but the haves would be worse off.”
Education is one of those things that we look at like cars. Socially, we don’t really mind if some people are educated and some are not. We recognize that there are Mercedes and that there are Yugos and that some people are simply going to walk.
But another thing about commodities and the market is that we believe that if the walkers are given cars, the Mercedes people are going to have to drive Buicks. It’s a zero sum game. In our society it sort of is; that’s the way we think about tax supported entitlements.
Other societies place a different value on education/training. We think that by requiring a minimal level of education we are placing a high value on it. Other societies place a high value on education at a higher level than we do. It becomes a priority because society wants it to be. They may look at this as a zero sum game in the sense that well funded education may take away funding from other kinds of social programs. But they don’t look at educational funding as a zero sum game within education, where it is somehow “natural” that some must lose and others must win. This is one big reason why the US ranks so low in so many educational standings.
But the market works here and we get what we want.
“The health care market has failed for business, because costs are out of control. Costs are out of control in the sense that medical costs year over year are far outpacing the general cost of living. Since many are uninsured and under-insured, and since commercial payers (those with insurance from the workplace) subsidize the rest of the system, real health care costs are rising faster than even the official health care cost of living would show. Business would like to get out of the health care business altogether . . .”
unagidon –
I don’t understand the issues here, except I know that costs are out of control. What is this about
In my amateur understanding of the industry, I keep seeing the pharmos and the suppliers of physical equipment as the heavies in the system. They are extortionists at best. Am I wrong?
“Education is one of those things that we look at like cars. Socially, we don’t really mind if some people are educated and some are not. We recognize that there are Mercedes and that there are Yugos and that some people are simply going to walk.”
If you were to put this statement to President Obama or Secretary Duncan – or the most recent President Bush – I expect they would vehemently disagree. It is true that, in educating our children, we produce Mercedes and Yugo outcomes; but it is not true that as a society we accept it or want it that way. If it were simply a question of will to solve the problem, we would have solved it decades ago. A lot of really bright, creative and passionate people have tried to improve failing schools and districts, and many billions of dollars of government funding has been funneled to them, and almost always, these attempts have failed to make an appreciable difference.
Public education would seem to be Exhibit A of the competing-interest-group politics that you described previously in relation to healthcare. In the case of education, the competing interest groups include policy makers, administrators, teachers and their unions, parents, and taxpayers. Sometimes the outcomes are good, as in some of the Chicago suburban school districts. Sometimes they are quite bad, as at a number of Chicago Public Schools. Public education seems to illustrate that competing-interest-group politics, when applied to social problems, frequently is a recipe for sub-optimal outcomes, even failure. Not always, but frequently.
You’re better attuned than I am to the competing interest groups in health care, but I assume they would include doctors and other health care workers; pharmaceutical manufacturers; insurance companies; hospitals and other health care delivery systems; researchers and manufacturers of medical technology; patients; taxpayers; and probably others that I can’t think of. After all the shoving and hair-pulling and gouging and lobbying was done in 2009, we ended up with the Affordable Care Act. Will it work? Nobody knows.
“But another thing about commodities and the market is that we believe that if the walkers are given cars, the Mercedes people are going to have to drive Buicks. It’s a zero sum game. In our society it sort of is; that’s the way we think about tax supported entitlements.”
Free markets aren’t a zero sum game because they have the capacity to create new wealth. When we are talking about education, though, or government health care programs, we are talking about the government’s capacity, and will, to spend more on the programs. It has almost never been true of government funding, including funding for schools, that it is a zero sum game. Governments have the ability to spend more by raising taxes or, as has been more frequently the case in recent decades, borrowing. In the case of the federal government, it also has the ability to turn on the printing presses and print more money.
To continue with your car metaphor: if Mercedes owners aren’t buying Mercedes because of the leather interiors and sound systems, but because Mercedes health plans provide access to costly treatments that lead to better health and longer lives with less pain and suffering, then there will be a tremendous political backlash if access to those treatments is taken away. My impression, though, from what I’ve read from thoughtful proponents of single-payer systems, is leveling down may not be necessary; such systems as they exist today in some European countries deliver Mercedes-quality health care, to everyone, at a Chevy price. Of course, that’s the goal. But how do we get there?
The great political hurdle, as I see it, is that relatively few Americans believe that this can happen here: that a single payer program can deliver Mercedes quality at a Chevy price. Whether or not it really, objectively could be brought about is beside the point; politically, relatively few believe that it can happen.
Back to unagidon’s original essay:
Indeed. But the nice thing about the free market is that it’s constantly in motion, eternally correcting itself. To substitute too much government intervention for free market stumbles or failures is to risk stopping that continual feedback mechanism, turning something alive into something essentially dead. Government, as I never seem to tire of saying these days, is a blunt instrument. Sort of a cudgel. Brute force. To substitute government for the market is to substitute a tyrant’s edict for a democratic free-for-all. A mixture of both is necessary – it’s essential not to let one destroy the other. (Hard to do unless you always keep in mind that you very much want the vital mix and that there’s always a danger of its falling too far in one direction or the other.)
Unagidon, thanks very much for your thoughts on the health-care-insurance mess. I take from what you write that there is, indeed, a consumer here and a product, but the both consumer and product are multiple, probably extremely hard to fit properly into an econometric model. But defining it that way does suggest a model, no? A complex one, but not impossibly complex. For example, a CAT scanner is a product and the consumer is the hospital and the government. (The government’s always one of the consumers because of Medicare and Medicaid.) A five-dollars-apiece pill is the product and the consumer is the government, insurance companies, and individuals. Of the three consumers – government, insurer, individual – only one is unable to comparison shop: the individual. Certainly, for government and insurer, costs are comparable. CAT scanners aren’t made by just one company.
End of partial thought.
“But the nice thing about the free market is that it’s constantly in motion, eternally correcting itself.”
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AWKK!! C’mon, David, even Allan Greenspan admitted he was wrong about that. I heard him say so on TV with my very own ears, or make that with closed-captioning. The poor man was truly astonished that there was no market self-correction, that there was such a dreadful meltdown. I felt sorry for him. He obviously was thinking that his blindness was in large part responsible for the whole mess. But he was honest, God bless him. Few people who make such big mistakes are willing to admit it so clearly as he did.
Ann, it depends on what you call a correction. A meltdown is a correction :o)
David –
You wish.