Regulations on food producers and salesmen would continually increase, typically exacerbating problems in such a way that the companies will further be blamed for continued problems. FULL ARTICLE by Troy Camplin
Source link: http://blog.mises.org/13355/suppose-there-were-food-insurance/
Suppose There Were Food Insurance
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The complicated and very expensive health care system in Germany shows that the author did not dream something up. It’s pure reality over here.
Klaus
Look no further than the USA to see nothing was dreamed up…
it’s really nice
Car Insurance For Women
I’ve known far too many old people who go to the doctor because they are bored and not paying for it.
At least Libertarians should know the difference between “insurance” and a pre-paid health service. The only true health insurance was the major medical insurance back in the 1950s that only covered over night hospital stays and accidents. The “seven dread disease” insurance and cheap accident policies peddled in schools was legit insurance.
Group policies that covered employees of large companies was legit insurance on the theory that people who were working for a living were healthier than the general population. They never covered pre-existing conditions or routine and expected costs.
One can’t buy fire insurance while your house is on fire. Neither should a sick person expect to buy health “insurance” for a pre-existing condition.
I don’t think anyone is saying that insurance should not exist – this is just effectively illustrating a point. When insurance got between health care providers and patients (largely as a result of state action), the economics got out of whack. Of course, state licensing of doctors and nurses (and even keeping hospitals from opening) is another factor (along with others).
If there were private insurance, the companies would have to be solvent to continue to exist. Consequently, the amount of financial coverage for food could not become excessive.
Definitely food for thought
I can just see in the beginning stages of the food insurance program how people would sort themselves class-wise not only on the basis of their income (which they do already), but on their food policies as well.
Not only that, but the very existence of such policies inhibits free choice. Want a can of peaches? Sorry, not covered by your plan. You’ll have to upgrade to our more expensive and premium Platinum Plan.
You can tell how this cycle ends — it ends with people crying for government intervention. Hegel would be all over this.
We should take this kind of analysis back one step, else we might ask how such stupidity as being ‘insurance’ for routine costs ever came about and succeeded on the market. We should explain further that employers began offering food insurance because one of the largest economic ignoramuses ever to occupy the White House (and that’s saying something) banned increasing wages while his buddy (wearing a WIN button, no less) was whipping up inflation. To compete for labor, employers began offering food insurance as an extra – and then the government started requiring them to do it.
Solid article. I’ll add it to my kids’ reading list. I wish Pixar would make a movie like that.
In fact, “food insurance” does exist, and is in no way incompatible with the the free market.
It’s called crop insurance, and is marketed to farmers. The idea is that various environmental conditions leading to crop failure occur with statistical regularity, but in unpredictable locations. Agricultural futures could also be considered a kind of “food insurance.”
That is clearly not what is meant in the article. Perhaps it would be even more clear if Troy had used the phrase “grocery insurance.”
“That is clearly not what is meant in the article.”
True. The reason that I feel that the article is a failure as a defense of the free market is because “food insurance” is something of a straw man.
How so?
Food insurance is a straw man because:
1) No such product exists. Nonexistent “food insurance” is described as being unprofitable and then criticized for being unprofitable. In reality, nothing is know about the marketing of non-existent products.
2) The imaginary flaws and failures of the imaginary product are alleged to be identical to those of the real product, medical insurance.
Wow. Ever heard of a little thing called an analogy?
Ever heard of satire? Analogy?
Crop insurance is run by USDA, is it not? I wonder if it would exist without Federal involvement?
Unlikely. Farmers prefer to trade on the derivatives market to avoid the negative effects of market fluctuations and crop failures.
No, the problem is the government-enforced medical trade union.
Excellent article. The highlight:
“People do have to eat, after all. How can one profit off something people need to survive? One could expect several decades of demand that the government do something about rising food prices.”
Go open your not-for-profit farm or grocery store (or just give away all the evil profits) and see how long it lasts. I assume you work for free, BTW?
Troy, nice article.
And here I thought the punchline was going to be deposit insurance, banks, securities companies, rating agencies, and Freddie/Fannie!
http://mises.org/Community/blogs/tokyotom/search.aspx?q=deposit+insurance
TT
Very interesting article!
It made me rethink about the very nature of insurances. Generally speaking – Insurances should take something from all their customers in order to POTENTIALLY provide each of them with something more valuable than the premium. If I pay 100 $ every month to insure my beautifully expansive Chinese vase and my stupid cat crashes it, I expect to receive from the insurance company something more than what I gave them OVERALL since the beginning of my contract. That’s a catastrophic event and it’s just fair that I get more than what I paid – otherwise why to have an insurance at all? In the same way, if I had something like a “food-insurance”, I expect to receive more (or better food) than what I could have bought myself with the insurance premium. Otherwise, again, why to purchase any food-insurance?
So, where does that “surplus” that makes an insurance marketable come from? From other subscribers of course! With insurances, somebody else takes the (financial) responsibility for my bad choices (lung cancer) or my bad luck (Chinese vase gone). Some might say this is essentially immoral – but my feeling is that there is nothing wrong in this, as long as subscribing such insurance plans is merely voluntary. The whole welfare system is nothing but a set of mandatory insurances.
The story of that food insurance would have been different if people would still be allowed to buy food directly and a decent percentage of people would still buy their groceries the old fashioned way.
That’s definitely true with insurances against “affordable” situations or “personal” catastrophic events. But I am afraid there are cases in which obligatory insurances might be the best practical solution for everybody. I have in mind – insurances covering for extremely high expanses when one part is responsible for serious damages to someone else. If my insurances did not cover for lung cancer and I get one – well, it’s mostly my problem and I will suffer the consequences of my bad choices. But if I drive my car drunk, penniless and uninsured – should someone take care of their own operations (we are talking millions here), when it was me who run them over with MY car? Can I say – “well, you left home and you took your chances… this time you had no luck, next time buy yourself an insurance!”?
In such a scenario you’d be reinstated to the same pecuniary position before the fortuitous event occurred. The whole point of insurance is to protect against the unexpected: it’s a risk transfer mechanism; that doesn’t necessarily mean the claim will be on par with what you as an individual have paid during the duration of the policy.
>>>Rather than everyone paying for food with their own money, people would pay a certain fee to their insurance company every month, and in return the insurance company would pay for all of its clients’ groceries.<<<
That isn't insurance, but I understand the concept exercise and it's an interesting one.
The issue is that food consumption lacks a catastrophic element. You may break an egg, spill some milk, or someone in the office may steal your sandwich out of the fridge, but that hardly classifies as a catastrophic event.
As for insurance, it’s more akin to a gambling activity. Both of you are betting the insurance policy doesn’t have to be exercised, but you as the consumer are betting that, in the long run, the cost of the insurance will be less than the cost of potential causes for insurance use in the future. The insurer is gambling on the fact that you won’t have the problem you insured against. If the insurer wins, you’re out your premium. If you gambled right, you get a full replacement or repair of whatever is insured at a deeply discounted cost. This, of course, doesn’t fit the mold of what we call health insurance these days. You, the consumer, always lose as the insurer knows that the policy will be exercised regularly and the only way to avoid going out of business is to ensure that the premiums collected exceed your own use. It’s no longer a gamble, thus no longer insurance.
I don’t think insurance companies take bets. Well in a way the do – since all entrepreneurs take bets. But insuring does not mean – to bet against your clients, I think. Somehow I imagine insurance premiums are determined multiplying a certain risk factors and keeping a decent margin for profits. Let’s say, 10% of people risk to be robbed once every 5 years; also let’s say that the average amount of money stolen is 100$. We can say that, if we multiply the risk factor for the sums involved, in a certain community, every person virtually loses 2$ a year. So the insurer says – “Ok, each of you risk to lose 100$ once every five years…. but if you give me 5$ a year, I am going to give you back those 100$ in the event of a robbery!”. So, if ten guys subscribe the insurance (and IF they pay regularly their premiums… here’s the bet for the insurer), at the end of five years (1) the insurer collected 250$ and had to give back 100$ for the usual unlucky fellow (so, let’s say 150$ of profit) (2) the unlucky guy got his money back, as he was expecting. So everybody wins – assuming that the risk factor have been realistically and carefully determined.
Yeah, there’s a lot of actuarial work in insurance: the maths wizz-kids are the ones that determine the risk and hence the premium; for simplicities sake the actions of the individual (or environment depending on what the insurance actually is) are usually devolved into moral/physical hazards. Of course it’s more complex than that as particularly large risks are re-insured!
Andre: The insurance business is the very essence of gambling. In accepting the bet, the insurance company is gambling against the outcome: a covered loss. And the insured party is gambling that a loss may occur– in which case he is indemnified.
Actuarial tables are exactly like those tables memorized by poker players, that describe the likelihood of getting a full house or an inside straight. The better tables you own, the better are your gambling outcomes.
Here’s another nugget of knowledge: the house always wins. So if you insure your house with a company, you normally end up paying out more than if you self-insure (by paying the premium to yourself). The rub is that when you only own one house, one loss can be a crusher. Your number came up bad, and you suddenly owe yourself $2-300K– more than you can come up with. Don’t have an insured loss? Then you lose every time.
People who own a number of houses, and have some cash reserves, are almost always better off self-insuring, just because they come closer to approaching the odds of a loss. A friend owned a dozen houses and had some cash, so she decided to self-insure. In only two years she had saved the cost of one total loss among those houses, just by not paying premiums.
But that, of course, is something of a gamble. She might conceivably have had TWO losses, in those first two years. Which would have been a cash-flow wipe-out.
Looks like some folks were gambling on the prospects of the wrong “business”:
http://news.yahoo.com/video/weather-15749664/storm-destroys-dam-21087429
Look for a lot more of this (and of course, simpleton, that doesn’t mean I ever wanted you all to be so ignorant as to cause the demise of this country)
The very essence of gambling can be seen right now in thousands upon thousands of gas stations in America right now. Where the millions of victims of Michael’s “free” schools get played in a numbers racket so that Michael’s grandkids can play in a “free” park.
That isn’t strictly true. The insured isn’t betting that the event WILL happen but that a fortuitous event could occur whereby the insured would be at a financial disadvantage compared to how he would have been previous to the fortuitous event; as I say, it’s merely a risk transfer mechanism: there has to be a perceived value in the policy otherwise it wouldn’t be bought.
Health insurance is a benefit insurance and there are usually a plethora of warrants attached to it, they also usually operate with a franchise. Premiums aren’t solely based on ‘use’: frequency is an important measure, but so is the severity of the operative clause within the policy and even more important is the individual itself: premium is predominantly based on the individual as a potential risk; if you’re more susceptible to a particular ailment then you’re premium will increase. But actually more important than that is the insurance cycle: insurance companies generate most of their revenue through investment, they’re right up there with the investment banks: hard cycles usually dictate higher premiums to offset smaller returns in investment.
Of course, with health insurances things are much more complicated, due to many factors involved and, yes, the insurer does not have to bet that the “catastrophic” event is going to occur, quite the opposite… but the possibility of paying the premium must be taken into account, otherwise, bankruptcy is behind the corner.
Also, another thing is bothering me. Is this “catastrophic event” really essential to every “genuine” insurance? I think that the mechanism described in the article sounds like an insurance to me – even if clearly no catastrophe is involved. Tory speaks of a “risk transfer”, but that might be an unnecessary limit. We can speak of “cost transfers” or “financial responsibility transfers”, so we can broaden the concept.
Maybe the problem is that, when it comes to health insurances, all those periodic check-ups are somehow connected to the catastrophic event they try to prevent or foresee. I mean, the insurance pays something for your those periodic check-ups in order to save on countermeasures for catastrophic events. With the food example there is no such an element.
Catastrophe insurance is usually used to describe particularly large risks (like hurricanes or tornadoes) in health, it is usually something like AIDS or cancer; but then I doubt any insurer would offer health insurance to someone with, say, AIDS as the risk is far too high. Someone actually developing a particularly catastrophic ailment is counted in the statistics that determine the level of premium/the likely claims an insurer has to pay, i.e. it’s high severity but low frequency, and that is part and parcel of any insurance company – I’d imagine that they’d have some sort of proportional re-insurance in play for those particularly large risks should they occur.
The event described in the article isn’t insurance because there has to be an element of indemnity (assuming it’s non-benefit, i.e., non-health/sickness) for it to actually constitute a viable insurance policy: there has to be a financial detriment to the insured in which the operative clause of the policy comes into effect with the insured being fully indemnified (i.e. being reimbursed so he/she is financially no worse off – or better off! – previous to the event occurring).
It is generally a risk transfer: I think that’s apt whether the policy is a benefit policy or not; you’re paying a premium so as to protect yourself from an unknown fortuitous event, i.e. you’re financially protecting yourself should the worse happen.
The whole welfare system is nothing but a set of mandatory insurances.
The problem with that analogy is that the welfare system doesn’t distinguish between the truly hapless and those who bring their misfortune upon themselves. A sensibile insurance policy (take life insurance, for example) makes that important distinction. This prevents an incentive to become “unfortunate” on purpose.
The story of that food insurance would have been different if people would still be allowed to buy food directly and a decent percentage of people would still buy their groceries the old fashioned way.
It also helps that it is not (yet) a legal requirement for the manager of a grocery store to have 8+ years of rather expensive higher education.
But I am afraid there are cases in which obligatory insurances might be the best practical solution for everybody… if I drive my car drunk, penniless and uninsured – should someone take care of their own operations (we are talking millions here), when it was me who run them over with MY car?
Rather than using violence, as you suggest, the proper solution to this is for the potential victim to have insurance against accidents that are no fault of the insured. The mechanism by which such insurance would be affordable would be the ability of the insurance company, once it has paid the insured, to sue the perpetrator of the accident.
Or, yes, you could simply drive without insurance and take the (incredibly small) risk of being hit by a penniless driver.
RWW,
Beautiful, sincerely; nearly as Mozart is beautiful, in the way I’m sure Dr. Block would agree.
You’re all just great, thank you. Nothing pains me more than the fact that you profound and gallant fellows will tragically lose all these battles.
I definetely agree with your comment on the welfare system. You’re absolutely correct on that.
But I have to retain my doubts with the driving example. First, the risk of being hit by a “penniless driver” is not so small, at least around here. Where I happen to live, lots of prehistoric vehicles dangerously roam unisured. If they bump into your car, you simply go and pay it yourself. You cannot sue a person who have nothing to be taken – you just end up losing more money on your lawyer. And no insurance company, no matter how smart, can dig money from someone’s empty pokets. That is why there are specific PUNISHMENTS (fees and so on) for those who drive about without being insured. I think it’s like going around with a shotgun, firing at random… you simply cannot be allowed to do that.
First, the risk of being hit by a “penniless driver” is not so small, at least around here.
The risk of being hit and badly damaged by any kind of driver is quite small anywhere, and especially if you are a reasonably aware driver yourself, so the risk of being hit by a member of some subset of drivers is even smaller.
You cannot sue a person who have nothing to be taken – you just end up losing more money on your lawyer. And no insurance company, no matter how smart, can dig money from someone’s empty pokets.
Fortunately, the benefits of insurance do not depend on the company being able to sue every faulty driver effectively — or even any driver at all, if it comes down to it.
That is why there are specific PUNISHMENTS (fees and so on) for those who drive about without being insured.
To be fair, in a free market, it seems likely to me that most road owners will choose to require insurance in order to use their roads. And that is their right. But the state does not have a legitimate claim to the roads. If anything, they’re common property, so no one has a right to restrict access that isn’t outright harmful.
I think it’s like going around with a shotgun, firing at random… you simply cannot be allowed to do that.
So is it perfectly all right to go around with a shotgun, firing at random, if someone is bound by contract to pay for any damages or loss of life caused by your actions?
“The risk of being hit and badly damaged by any kind of driver is quite small anywhere, and especially if you are a reasonably aware driver yourself”
Are you serious? Tell me where do you live, because that’s quite far from my everyday reality. The risk of being hit and damaged is quite high everywhere I know (compared to other risks, of course). If you are less than 30 yo, car accidents represent the first cause of death. No matter how you put it, roads, streets and highways are dangerous enviroments. Being a “reasonably aware” driver does not help at all, I assure you – if you were driving as much as I have to, you would agree with me.
“it seems likely to me that most road owners will choose to require insurance in order to use their roads. And that is their right. But the state does not have a legitimate claim to the roads.”
So you see you agree with me. I really would not mind if it’s a local monopolist (the road owner) rather than the national one (the state) requiring me to be insured in order to drive. Just – be sure I would keep away from those roads where you’re not expected to drive insured.
“So is it perfectly all right to go around with a shotgun, firing at random, if someone is bound by contract to pay for any damages or loss of life caused by your actions?”
Here you missed my metaphor. All I wanted to say is that very dangerous actions should be forbidden, period. It’s something like a pre-condition of a free market, in my opinion.
The risk of being hit and damaged is quite high everywhere I know (compared to other risks, of course). If you are less than 30 yo, car accidents represent the first cause of death.
Taking a glance at government stats, something like 1/25 of a percent (0.0004) of adults under 30 die each year due to “unintentional injuries.” That it’s the leading cause of death does not make it a considerable risk.
…if you were driving as much as I have to, you would agree with me.
Oh, lovely reasoning.
I really would not mind if it’s a local monopolist (the road owner) rather than the national one (the state) requiring me to be insured in order to drive.
I said nothing of a monopoly.
Just – be sure I would keep away from those roads where you’re not expected to drive insured.
And I would not, unless I had some other good reason. That’s the beauty of the market.
Here you missed my metaphor. All I wanted to say is that very dangerous actions should be forbidden, period.
You’re contradicting yourself. Should “dangerous actions” (judged to be so by you and your subjective tastes) be “forbidden, period,” or should property owners be able to decide?
I didn’t miss your metaphor — I called you on the fact that the act of driving is fundamentally different from, not to mention less dangerous than, firing a shotgun at random. Your metaphor is misleading.
“Where I happen to live, lots of prehistoric vehicles dangerously roam unisured. If they bump into your car, you simply go and pay it yourself. You cannot sue a person who have nothing to be taken – you just end up losing more money on your lawyer. And no insurance company, no matter how smart, can dig money from someone’s empty pokets.”
You can’t get uninsured motorist coverage? In the United States it’s a standard rider available to add onto your policy. You can cover yourself against damage by an uninsured driver or vehicle. You should ask your broker for it.
It doesn’t matter how big or small the risk is of actually hitting another vehicle whilst driving: the fact is the risk is still there; however, the whole purpose of motor insurance is not necessarily to protect the vehicle, but the individual – there isn’t a cap on liability for injury/death.
It doesn’t matter how big or small the risk is of actually hitting another vehicle whilst driving: the fact is the risk is still there…
Are you arguing that whenever it’s possible (no matter how unlikely) that my actions or property might seriously harm another person, I am obligated to have insurance against that event?
In regards to motor insurance, yes. It’s to cover YOUR liability, i.e. to protect OTHERS.
The issue is that food consumption lacks a catastrophic element.
This occurred to me as I began to read the article, but the analogy being made with “food insurance” is to the portion of health insurance that covers regular expenses (which you criticized later in your own comment). I think most will agree that insurance for catastrophic health problems makes sense, but the rest of what is called “health insurance,” which really isn’t as you pointed out, is akin to “food insurance,” and is leading to the same outcomes that we would expect if there were such a thing.
With the rising cost of groceries and the increase in hunger and malnutrition we may not be too far from companies issuing food insurance. Remember people once thought pet insurance was unrealistic.
I worked in a College Dining hall when I was in school. We fed about 1000 people
3 meals a day on just such a “food insurance” plan.
We had to completely control the menu, otherwise costs went out of control.
These days I recognize the menu as a cheap, fattening, artery clogging high-carb low quality diet.
We had athletes who ate 2 or 3 times average, of course subsidized by everyone else.
Since nobody paid for particular meals, nobody cared about taking only what they would eat, so the whole system was wasteful.
We had a large contingent of disgruntled customers who wanted out for diet or cost reasons who could not leave the system.
Eventually the school replaced it with a pay-for-what-you-eat system, though the transition was not easy, since the facilities, built over 50 years for flat fees, were not built for pay-for-what-you-eat.
Health care will collapse too.
The equivalent of the over-fed athlete in the health care world will not be 3 times average but more like 100 times average.
We must hope it bankrupts faster, and that the current system is not completely forgotten before
it collapses.
I worked as a supervisor in a Dining Hall when I was in College. We fed about 1000 people
3 meals a day on just such a “food insurance” plan.
We had to completely control the menu, otherwise costs went out of control.
These days I recognize the menu as a cheap, fattening, artery clogging high-carb low quality diet.
Sometimes, as an exception, we served fancy, expensive meals as a propaganda ploy, usually
cited if someone asked about the food.
We had athletes who ate 2 or 3 times average, of course subsidized by everyone else.
Since nobody paid for particular meals, nobody much cared about taking only what they would eat, so portions had to be controlled and the whole system was still wasteful. One form of protest was to intentionally take food that was not eaten, something clearly seen in the dish room.
We had a large contingent of disgruntled customers who wanted out for diet or cost reasons who could not leave the system.
The only way out was to abandon the dorm system itself, which many did, causing a building boom of apartments across town and then low
occupancy in dorms. Those who stayed in the dorms, who could afford it, augmented with meals in local restaurants.
Because of flight from the dorms over this issue, occupancy rates and thus bond payments on the dorms were at risk, and eventually the school administration replaced it with a pay-for-what-you-eat system, though the transition was not easy, since the facilities, built over 50 years for flat fees, were not built with room for normal cash registers. It was an expensive fix, since the competing apartments never went away.
Health care risks similar, obtuse, unintended consequences, as it perverts the structure of society. Fewer, not more, people will want
to be part of health care as it will eventually provide a dangerous, 3rd world service. Intentional over use as a form of protest will also eventually happen. (Hey doc, I just sneezed, what do you think?) Wealthy people will leave the country for care just as wealthy students left the dorms. There will be some programs/meals, strictly rationed, that are used as propaganda for the overall system. We can only
hope that in the wreckage of this system that a viable competitor emerges that forever cripples health care administration as we know it.
The biggest mistake that you made in your analogy is the assumption that with insurance everyone pays the same, which is NOT the case. Those that incur higher expenses are charged a higher premium. It’s referred to as Individual Risk Premium Modification. There are many additional factors that go into the premium calculation…
With choice comes consequence, those that choose to eat more expensive food pay for it with their premium. Cost of food would still be regulated as the majority would avoid the higher priced foods in order to maintain an affordable premium.
Insurance companies would constantly find ways to make sure that those who abuse the system (make more claims than the actuaries say they should) pay more than those who don’t.
“Suppose there were food insurance. Rather than everyone paying for food with their own money, people would pay a certain fee to their insurance company every month, and in return the insurance company would pay for all of its clients’ groceries.”
the level of ignorance of what “insurance” is, and how it functions, demonstrated in this statement, is appalling.
the author no doubt knows something worthwhile about SOME topic. he should confine himself to blogging about that topic.
Hi, you used to write magnificent articles, but the last few posts have been kinda lackluster… I miss your super articles. Past several posts are just a little bit out of track!
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