Krugman, Health Care, and the Free Market
Paul Krugman has a recent post, giving two reasons why the free market cannot cure health care. As should be no surprise to a Mises.org reader, Krugman is quite wrong.
Drawing from a classic article by Kenneth Arrow, Krugman gives two main reasons that health care is something that cannot be left to a free market.
First, health care expenses are characterized by risk. That is: there is a relatively low probability of having a very large expense. Typically, these large expenses are such that an individual could not afford to pay them out of pocket, should the need arise.
The conclusion: health insurance is necessary.
As far as this goes, Krugman is largely correct. Health care is largely characterized by having a low probability of getting hit with some very expensive medical conditions, so some sort of insurance is a sensible solution.
However, there is no reason to claim that insurance of this type is not a "free market" phenomenon. Now, it is definitely true that our current health "insurance" scheme is not really very "insurance" like, for the most part. (Auto insurance doesn't pay for oil changes - nor should health insurance pay for predictable annual physicals, if it exists to protect against unforeseen events.) However, this does not rule out the possibility of actual insurance in health care.
So far, we've seen that Krugman's first point - though correct on the surface - does not show that the free market can't cure health care. All he has done is predict HOW the free market would sensibly do it. This leaves a question: How does Krugman come to his conclusion from this point? Well, he makes a few claims about insurance that simply aren't true.
"It [health care] must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy."
This does not follow at all. Now, it is true that someone other than the patient MIGHT end up making decisions about what to buy. But, there is no reason at all that this is the way things must be. For example, one could easily imagine a health insurance setup in which insurance companies paid a flat amount of money for a particular diagnosis, and leaves it up to the patient to decide how to spend that money. (For example, a cancer patient may decide to take a trip around the world rather than seeking treatment.) If we assume that the free market insurance scheme MUST work like the one we have, then what Krugman says is true - but that assumption is far too strong. Whenever markets are freed, they tend to breed variety - so it is very likely that at least some insurance companies would have a payment scheme like the one I suggest here.
"This problem is made worse by the fact that actually paying for your health care is a loss from an insurers' point of view -- they actually refer to it as 'medical costs.' This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care."
The first part is, in fact, always the case with insurance - or gambling, for that matter. Yet, when it comes down to it, most insurers (and casinos) do pay in the event that they are supposed to according to their contract. Apart from any legal ramifications from a contract breach, insurance companies also have to deal with negative consequences arising from customers being dissatisfied. If my mechanic cuts corners and puts only water in my radiator rather than coolant, then I will stop going to that mechanic - and you can bet that I'll bad-mouth him on my personal blog, and give him a negative review with AAA. (Note: I'm actually quite satisfied with my mechanic - so no worries.) Insurance companies - in a free market - would be under precisely the same pressure. If they refuse to pay when they obviously should, then they will lose customers and develop a bad reputation. This encourages insurance companies to actually pay when they are contractually obligated to.
As far as avoiding covering people that are likely to need care - this is not so. In a free market, people who are in poor health will likely still be able to get health insurance - it will just be quite expensive for them. This is, of course, natural. Teenager drivers (or drivers with accidents on their record) are bigger risks - therefore, the fair thing to do is charge them more for insurance. The same goes for those that are under signficant health risks.
Now, it is true that, on some level, this strikes people as "unfair". There is something in most people that makes them feel quite uncomfortable with charging the sick more than the healthy. We have a sense that "they've already been through enough". Here, there's a simple solution: private, voluntary charity. As Mises pointed out, action can be thought of as an attempt to remove a "felt uneasiness". Certainly, seeing the chronically ill have to pay a lot for their medical expenses creates a felt uneasiness in many, and therefore it is quite likely that private charities will be set up to help alleviate the cost for sufferers of various chronic conditions. The marvelous thing about this system is that it is precisely those conditions that society actually feels compassionate toward that will receive the compassion, as it is quite likely that at least some of these charities will be disease-specific (after all, we already have numerous disease-specific foundations that fund research - so why not ones that fund actual treatment?).
So, what is clear: Professor Krugman's first point is not anywhere close to sufficient to showing that a free market cannot solve the health care problem. Even if we grant that insurance will exist (and it probably will), it does not follow that health insurance companies in a free market will perform poorly.
"The second thing about health care is that it's complicated, and you can't rely on experience or comparison shopping."
I could grant Krugman his first claim. But, I cannot grant him this one. From what is written here, it is immediately obvious that Prof. Krugman has not faced any serious illnesses. If he had, he would be aware of something called a "second opinion". It is not the least bit uncommon for people to seek a second opinion, or, when one procedure has failed to prove effective, to try another - often from a different doctor with different ideas. Effectively, what all of this is is "comparison shopping that relies on experience". So, based on a purely empirical level, Krugman's claim is false. Now, it is true that because of our current insurance scheme that we don't compare along the lines of price most of the time. But, we certainly would if prices were paid more directly by the consumer. (Note: I know that, for me, there is a significant exception to this rule. When I seek treatment, I choose a visit with my primary care physician if possible. The reason? Because the copay on my other options - urgent care and the emergency room - are significantly higher than for my doctor. Put simply: people do respond to prices!)
As an additional point, Krugman's argument is sneaky. For a moment I was going to suggest that Krugman's connection between "complicated" and "can't comparison shop" was false. Then I noticed: he actually doesn't connect the two. He doesn't say "it's complicated, therefore we can't comparison shop." He says "it's complicated, and we can't comparison shop." These are two different points. I've already dealt with comparison shopping, so let's go back to complication.
Let's face it - lots of things are complicated. A car is a sophisticated piece of machinery. The laptop I'm typing on is sophisticated. Lots of things are sophisticated. True, the human body is several times more sophisticated. But, I don't have to be a mechanic to know that my car isn't running "right". I don't have to be a computer expert to know when my internet connection is "laggy". And I don't have to be a doctor to know that I "don't feel good". The fact is that what matters in my experience as a consumer of various services is my experience as a consumer of various services. The only reason complication matters is because it causes me to seek out an expert rather than try to solve the problem directly myself. But, once I follow the expert's advice, I am capable of evaluating whether it worked - in as far as I care as a consumer.
In fact, as Austrians know, complication is a point for the free market. As Hayek noted, one significant problem with central planning is the information problem. There is simply too much information in the economy for a central authority to be able to process it effectively (or even gather it, as a very large portion of the information is actually not directly observable). So, given this complication, it makes far more sense to have consumers decide what matters and what doesn't - as only consumers have the most important information: does their experience match what they want from their health care system? If we want to get a "yes" answer from that question, we should adopt a system in which consumers have choices. And, as we all know, the free market provides far more choices than any centrally planned system could.
Comments (54)
Dick Fox
I cannot believe the man is such a fool. Because there can be catastrophic causes of loss of health someone else has to make your decisions for you? Give me a break. Then because it is complicated someone else has to make your decisions for you? This is sick.
So Krugman assumes that he is the only one in the room smart enough to make such decisions for the rest of us. The man is a poster child for hubris.
Published: July 28, 2009 8:48 AM
FTG
What boggles my mind is how (some) people take this clown seriously when he makes all those obvious non sequiturs and exercises in question begging:
Health Care has risk, so Insurance is necessary [does not follow], so decisions are made by someone else besides the patient [begs the question], so why leave it to the market then? [false conclusion].
Really, this guy has no more than High School reasoning skills - either that or he is simply a shyster who's simply being intellectually dishonest just to push his agenda.
Published: July 28, 2009 9:07 AM
David Janello
Obama-Krugman's health plan is an essential part of the one-party two-tier society they are building.
Not only will socialized medicine maintain their personal status with first-class health care for themselves, and second-class care for everyone else, they can use the carrot of high-quality medical care to reward their friends and punish their opponents. They can also use goverment-funded care for illegal aliens to import more Obama voters.
Published: July 28, 2009 9:30 AM
Dirk
There are already charities that pay for medical expenses. My wife and I have given to St. Jude medical hospital for years and I would recommend that anyone who feels uneasy about the poor not getting health care should do the same. Those who do not support such charities, at least verbally if not financially, have no business telling us we need a government system. If they truly cared about the poor getting health care they would already be giving their money to these causes.
Another great thing about charities, is that they are free market oriented. If they do a bad job they will lose donations and lose the ability to function as opposed to the government who will just tax or borrow to make up for their inefficiencies.
Published: July 28, 2009 9:49 AM
Lucas Engelhardt
Dirk,
Excellent point. My guess is that in an actual free market (without Medicare/Medicaid), we'd see a lot more charitable giving for these types of things. We will have eliminated the farce that the government takes care of the poor, and we would have more resources to devote to this purpose.
And I can definitely echo your frustration with those that call for government intervention that are doing nothing themselves to solve the problems. It's just so blatantly obvious that either (a) they don't care enough about the cause to find out how they can work toward it individually, or (b) they only want the problem solved if someone else has to foot the bill.
Published: July 28, 2009 9:55 AM
RWW
Auto insurance doesn't pay for oil changes - nor should health insurance pay for predictable annual physicals, if it exists to protect against unforeseen events.
Physicals are preventative and thus often reduce the costs and/or improve the effectiveness of treatments, so there is some incentive for an insurer to consider covering physicals.
Other than this minor point, great article.
Published: July 28, 2009 10:43 AM
AJ
Governmental control of medicine (cost cutting) + illegality of supplemental/private insurance = Death
Can you imagine if we reach the point where the state dictates what will be paid for AND dictates that it is illegal for individuals to supplement or upgrade their care on their own dime?
This is where we are going folks. No, this isn't the Obama plan, but someday we will get there.
Published: July 28, 2009 10:43 AM
Tom Human
"Health Care has risk, so Insurance is necessary [does not follow]"
I'm sorry, why does this not follow? Are you seriously suggesting self-insurance is a viable alternative for your health?
Overall, people here are extremely impractical. The free market is neither good nor bad, it's a tool that humans can use for their own purposes.
The fact is that free market health care has not worked. I work in the US for a large, rich company and I get the best health care money can buy - there is no question in my mind that the care I got in Canada was better, by which I mean "improving the quality of my life and my life expectancy more".
Every other country in the Western world has socialized medicine of one sort or another. They aren't going bankrupt doing it. The results are excellent - and the citizens love it.
These are countries that actually have a somewhat functional democratic system - where there are actual differences between the political parties and sharp changes of government - and yet never does anyone run on the platform of eliminating socialized medicine.
And, yes, the ultra-rich can still get the best treatment if they pay for it!
The fact is that socialized medicine is the best solution to a game-theoretical, economic problem. "The emergency room", almost-instant access to live-saving measures with no questions asked, is such a great good that most people are willing to pay quite a lot of money in advance to make sure that always is there for them.
But there's almost always a more economic way to provide health care than the emergency room... which leads to public health and socialized medicine.
Again, it's game-theoretically better for the rich to keep the poor healthier. Universal vaccination has eradicated many diseases that used to cause epidemics and kill millions, poor and rich alike. A healthier population means a more productive labour force.
And like anything else, medicine can take advantages of economy of scale - it benefits even the small number of rich people if everyone gets care.
Taxes for things like public health and public sanitation are a *good* thing. Before this, people like you and I would routinely die in the street and be eaten by dogs of something that today would be a quick trip to the doctor and forgotten about in a few weeks.
So you can use all the jargon you like about socialized medicine but the fact is that it's effective, that every other civilized country in the entire world EXCEPT the US has it, and it costs them a lot less than our "private" system costs us.
You want to pay a lot more for an inferior product just because of your "religious" beliefs about economics - I put it to you that you are behaving in an essentially uneconomic manner.
Published: July 28, 2009 10:46 AM
RWW
"Health Care has risk, so Insurance is necessary [does not follow]"
I'm sorry, why does this not follow?
You seem to have misread the article, as this claim is never made.
Taxes for things like public health and public sanitation are a *good* thing. Before this, people like you and I would routinely die in the street ...
You assume that taxes are necessary for good health care and sanitation systems, and you also assume that the taxes somehow caused the advances you hyperbolically describe.
...and it costs them a lot less than our "private" system costs us.
"We" in the U.S. do not have a free market system. Not even close. The fact that you claim otherwise gives away your utter lack of understanding. Please try to understand a position, at least on some level, before attacking it.
Published: July 28, 2009 11:45 AM
Rob
2 points
First, there is a comparison of sick people paying more for insurance to teenage drivers. Wouldn't a better analogy have been to compare them to people who need to use loan sharks?
Secondly, how many new theoretical charities would need to be created in order to pay for charging the unhealthy more? And would this not require an incredible leap in charitable donations?
Published: July 28, 2009 12:01 PM
ShedPlant
Tom Human,
I don't think many people here would argue that the US does in fact have a free-market health system.
It is true that many other countries have socialised medicine, but that doesn't itself affect whether it should be imitated.
I grant that socialised medicine is quite popular (at least in the UK). On the other hand, the NHS is in a perpetual state of crisis and reform; has under this administration suffered from multiple central top-down directives/targets, resulting in perverse unintended consequences; has received huge increases in its budget with little to show for it. Similarly, the few who can afford private care (at increased prices because of state competition) find the quality far better.
I personally suspect there's a case of lack of imagination among the public here. People seem to believe health care a human right that must be provided free of charge, cannot conceive an alternative to the current system, and yet keep expecting ministers to 'fix' the obvious problems. Your alarmist comment about being eaten by dogs is a great example - the only alternatives you pretend exist are government involvement or humiliating death. But the problem is, sometimes the two go together.
Published: July 28, 2009 12:06 PM
Albert Jones
Free Market is a myth in today’s economics and the Corporations are reason for that.
I found your article missing the point, largely because you cannot value everything as money. The profound comparison that patients provider visits are equal to a shop mechanic service, it is an extraordinary view but very subdue perhaps. Look what happened to GM or Chrysler in our "free market" society. If I may compare you to a car you'll be a Trabant.
Regards,
Published: July 28, 2009 12:23 PM
Lucas Engelhardt
RWW,
Point. Though that makes one wonder why my auto insurance company doesn't pay for occasional mechanical checks - as it's very possible that mechanical failure will be the cause of an accident for which they would be liable.
AJ,
I'm more optimistic than you are, I think. To my knowledge, every socialized system has, alongside it, a private supplemental system. I highly doubt that American voters would support banning a private system - even if they do support implementing a socialized one.
Tom Human,
Actually, FTG is technically correct, if we use a strict definition for "necessary" (meaning... well... "necessary" rather than just "desirable" or "probable"). And the fact is that, for the majority of people, self-insurance HAS to be a "viable" alternative. (That is to say, over your lifetime, you have to be - technically - able to save enough to pay all of your lifetime health expenses.) If it wasn't, then insurance companies would make no money, as the average insuree would result in MORE expenses than revenue - and insurance companies would consistently take losses. Insurance companies make profits more than losses - therefore the average insuree must pay the insurance company more than they receive, and self-insurance must be viable. (Note: there is a "chink" in this argument... I ignore the fact that insurance companies typically negotiate for lower prices. That does weaken my argument. But, still, it only proves that health insurance is "likely" or "desirable", not "necessary".)
Out of curiosity, which free market in health care are you talking about? I know of none at the moment. Government intervenes in health care all the time. From tax breaks for those who are insured by their employers, to paperwork requirements, even down to telling patients that they are legally required to take prescriptions as their doctors instruct. This is not a "free market". So, I'm curious which one you're pointing to as "not working"?
That said - I'm perfectly willing to admit that, under certain circumstances, a socialized system can operate "better" (by some arbitrary, but objective, measure) than a regulated "market" can. For example, a fully socialized labor force may very well have less unemployment than a market that has a minimum wage, but that is otherwise free. However, it does not then follow that a socialized system will operate better (even on those same measures!) than a truly free market. The move from a "free market" to "socialized" is not a continuum, and as such there is no "spectrum" along which results can be measured. We have to untangle the particulars if we want to actually make a good evaluation of what works. What Hayek and Mises have shown, however, is that there are significant, inherent problems with central planning. Your comment highlights the Hayekian problem. Ultimately, what matters is the subjective experience of the consumer. This is something that cannot be observed - unless we observe a consumer pay for the experience. Then, we at least have a minimum on "how much the experience is worth". Once people stop paying for things, it becomes impossible to judge how valuable they are (in the subjective sense).
Your game theoretic argument doesn't prove what it is intended to prove, even if I accept it. Just to make sure the reasoning is clear:
For the rich, there are two possibilities: they either pay for the poor to be immunized, or they do not.
For the poor, there are two possibilities: they are either immunized or are not.
Preferences are like this: ("pay" means the rich pay, "immunized" means the poor are immunized.)
Rich: not pay, immunized > pay, immunized> not pay, not immunized > pay, not immunized.
So, if the rich take as given the state of immunization, they prefer not to pay. But, they'd prefer paying to have the poor be immunized to having the poor not be immunized at all.
Poor: pay, immunized > not pay, not immunized > not pay, immunized > pay, not immunized.
So, if the rich pay, immunization is preferred. But, if the rich do not pay, immunization will not be chosen.
Here, we can find a dominant strategy for the rich. Taking as given that the poor choose to be immunized, the rich choose not to pay. Taking as given that the poor choose not to be immunized, the rich choose not to pay. Result: regardless, the rich do not pay.
Sine the rich do not pay, the poor choose not to be immunized.
This happens, even though both parties would prefer if the rich paid and the poor were immunized.
However, your argument is quite weak for several reasons. [Warning: some of this gets technical.]
(1) The result is quite fragile. A small change in your equilibrium concept will change the outcome. You're assuming a Nash equilibrium in a one-shot simultaneous-play game. However, if the game is repeated, then the better outcome (Immunization + Paying) becomes possible if we allow the playing of trigger strategies (a strategy like "I'll keep paying for your shots if you keep getting them" and "I'll keep getting my shots if you keep paying for them" is perfectly stable in the repeated game, as long as the rate of discount isn't too high). Or, if we just change it into a simple sequential game, the outcome changes (we use a "subgame perfect Nash equilibrium", to use the technical term). Let's do that.
Let's assume that the rich get to choose whether they pay or not first, and that the poor choose whether they get immunized after. (This is sensible, especially if we adopt a private charity setup like I advocate.) In that case, when making their choice, a rational rich man will look ahead to the response of the poor. So, they'll do this reasoning:
If I pay, then the poor will choose to be immunized. Result: "Pay, immunized".
If I do not pay, then the poor will choose not to be immunized. Result: "No pay, not immunized".
As a rational rich person, I would rather pay and have the poor be immunized than not pay and have the poor not be immunized. So, I, the rich, will pay.
End result: the rich pay and the poor are immunized. Exactly as you suggest is the best option.
(2) It's not clear that Nash equilibrium is anywhere close to relevant. This is not a "Prisoner's Dilemma" where the rich and poor cannot communicate or monitor each others' decisions. It's perfectly possible for a rich person to walk up to a homeless man and say "have you had your shots?" If the answer is "no", then the rich man can say "Well, come with me to the clinic, I'll foot the bill." This scenario suggests that a sequential game (like I present in (1) ) is a much more compelling story. [Note: obviously, I'm not suggesting that CEOs will actually walk homeless people to clinics to solve the problem. What I am suggesting is that it's not difficult for either side to monitor the other. When a rich person sets up a free clinic, it's obvious to the poor whether it is free or not. It's also obvious to the rich whether or not it is being used.]
"Before this, people like you and I would routinely die in the street and be eaten by dogs of something that today would be a quick trip to the doctor and forgotten about in a few weeks."
I was tempted to let this slide, but I can't. The fact is that the reason we now just have a "quick trip to the doctor" is NOT because of socialized medicine. It is because a wealthy society can afford to expend resources on research, and a significant amount of the research we've done has been in medicine. So, we now have more knowledge about the way the body works, and how to treat common ailments. It should also be noted that centrally planned medical science tends to be atrocious. (For example, Soviets took a very long time to finally accept the gene theory of heredity. The Official Orthodoxy was that it was a Capitalist Lie.) The reason is obvious. Scientific advance requires creativity and independent thought, and the uniformity imposed by central planning stifles creativity and independent thought.
"You want to pay a lot more for an inferior product just because of your 'religious' beliefs about economics."
I must confess. I do have religious beliefs about economics. (Okay, technically they relate to economics.)
(1) I believe in freedom of conscience. So, even if I believed that forced immunization was "necessary" to achieve a "Pareto-efficient" outcome, I could not consider it moral if someone had a religious objection to being inoculated. [I find it disturbing that some people have a different opinion on that matter.]
(2) I believe that the right to private property was established by God. [I'm less disturbed by people that differ with me on that one.]
(3) I believe in pacifism - with a "moderately broad" definition. (By which I mean "the use of force is typically morally objectionable.") [Also not particularly disturbed when people don't agree with that one.]
All of these have a profound impact on my beliefs about what the law should be.
But, none of them have any direct impact on what economic law actually is. (There's this distinction between "is" and "ought" that I'm very mindful of.) Ultimately, if we want to argue about whether or not the free market "works", we have to argue on both bases. "Working" implies an "ought", and the consequences of the free market come from the "is". Good economists should not disagree on the "is", though we might disagree on the "ought". Here, Krugman's arguments "is" arguments are such that I can apply what I think is a sensible "ought" - "maximizing" consumers' subjective satisfaction. So, my attempt was to show that his "is" arguments didn't match the "ought" he was going for. Whether I succeeded or failed is in the hands of each individual reader. But, I hope that at least clarifies my purpose.
Published: July 28, 2009 12:30 PM
KP
Lucas Engelhardt:
Excellent post in regards to Krugmann, I found myself thinking the very same thing reading his article before I read yours.
Published: July 28, 2009 12:45 PM
waywardwayfarer
Setting aside all the tortured logic and dodgy empirical claims of that pro-socialized medicine screed, I have one question which no proponent of state-run health care has ever even attempted to answer:
Why don't these folks who think socialized medicine is the answer simply create their own cooperatives for purchasing medical goods and services for their members? Why do they inevitably prefer using the coercive power of government to force everyone into a socialist monopoly?
Published: July 28, 2009 12:45 PM
Lucas M. Engelhardt
Rob,
Fair questions. Let me look at each.
"First, there is a comparison of sick people paying more for insurance to teenage drivers. Wouldn't a better analogy have been to compare them to people who need to use loan sharks?"
I can see your argument there, though I'm not sure the difference is fundamental. In all these cases, the persons in question (the driver, sick person, and borrower) are all high risks, and all of them pay a premium because of that (whether it be a higher insurance premium or a higher interest rate).
I suppose you may be trying to get at the sense of desperation. Which, as far as that goes, is fair enough. As far as the analysis goes, I don't know that things change much. The fact of business is that high interest rates (typically) accompany high risk loans, and high premiums accompany high risk insurance policies. In both cases, voluntary charity can alleviate the higher costs. Which turns me to your next question...
"Secondly, how many new theoretical charities would need to be created in order to pay for charging the unhealthy more? And would this not require an incredible leap in charitable donations?"
As others have noted (Dirk, in particular), these charities are not completely "theoretical". Many already exist (St. Jude's being one). I think you know that there's no way to give any precise answer to these questions. After all, changing to a free market in health care would have several impacts that would affect the answer, and getting quantitatively precise estimates is beyond my expertise. Also, they would be impacted by the innovations introduced by entrepreneurs in the new - more free - system. But, let's just give some rough estimates.
First, the poverty rate in the US is about 11%. That means there are (roughly) 33 million poor living in the US (by official reckoning). According to the Dept. of Health and Human Services, spending on health care was an average of $7,421 per person.
So, if we wanted to pay all the health expenses for every poor person, a rough estimate of how much money we need is: $245 billion. That's a bit less than 2% of national income. Right now, about $300 billion in the US goes to charity each year. So, to be absolutely clear:
Assuming: (1) that 11% of Americans are poor and that there are 300 million Americans, (2) That the poor's medical expenses will be covered in their entirety, (3) that the average poor person will have the same medical expenses as the average American and that number if $7,421, (4) that $300 billion a year does in fact go to charity in the US.
Then: charitable giving will have to rise by roughly 82% to cover this.
However, I suspect that things would be much better for a few reasons:
(1) Our current system has artificially high prices in some areas because of excessive patent protections. Loosening these protections would result in lower prices. This would drive down the average cost of medical care per person. (Confession: I'm in the "Kinsella School" when it comes to IP, and believe that in a truly free market patents would not exist at all. Now, I just have to await the barrage from the Randians...)
(2) Our current system has large elements that drive up costs. This is especially true because "group insurance" is so common. Despite the fact that it is silly, from an insurance standpoint, to charge everyone that works for the same employer the same premium (risks are different, therefore premiums should be different), that is what a large percentage of Americans have (including my wife and me). Result: your payment for medical expenses has little to do with how many expenses you actually cause. So, we have a case where we have "privatized benefits and socialized costs". Whenever that happens, you get higher demand and that drives prices (and costs) higher on average. This system is in place precisely because of legislation (largely the HMO Act of 1973). If that legislation were gone, then groups plans of this structure would be far less common. (From an insurance standpoint, it only makes sense to charge the same premium to two people if they appear to have the same risk. Generally, a person's employer is not their primary factor in determining risks to their health - and it certainly isn't the only relevant factor.)
How much would eliminating these two effects do? I have no idea. But, just to get a guess...
Since 1970, CPI has risen 466%. Meanwhile, the medical portion has risen 1,044%. So, if prices on medical care had risen at the same rate as other prices, they would be about half what they are today. So, rather than needing to increase charitable giving by $245 billion, we'd only have to increase it by $123 billion.
But, let's remember: in a free market for medical care, we would not have to pay to fund Medicare and Medicaid. Medicare alone cost $390 billion in 2008. Medicaid cost an additional $320 billion (in 2007 - 2008 numbers aren't available as far as I can find).
Naturally, if we're going to do the free market thing, this $710 billion will not be taxed away at all.
So, as far as charitable giving goes. If you let me make my assumptions about differences in prices and all that...
For the US to provide for all the poor to have free medical care, we have to believe that, if the government eliminated Medicaid and Medicare and handed that $710 billion back to the people, the people would be willing to turn around and put $123 billion of it toward charities to take care of the medical expenses for those who are poor. This doesn't feel unreasonable.
Obviously, these are all VERY approximate figures. But, as long as my method isn't totally terrible, they should at least be in the ballpark.
Published: July 28, 2009 1:31 PM
Christopher
"we should adopt a system in which consumers have choices. And, as we all know, the free market provides far more choices than any centrally planned system could."
You are conflating the issue of actual health care with *paying* for health care. A system with twenty successful treatments for cancer offers no choice at all to the person who can't afford any of them.
If you are really arguing for choice of insurance, then be clear about it. It is disingenuous to imply that single payer health care systems limit choice in health care. Again, choices in health care are no choice at all if they are unaffordable. Overwhelming majorities of people living with single payer systems in other countries are very satisfied with the health care choices they have.
So then on choice in insurance: you seem to want to argue that some better form of free market will improve the choice in insurance to the point that adequate health care will be available to anybody. I would say the burden is on the free market advocates to prove that this is workable. Recent experience seems to indicate that things are getting worse not better.
On the other hand, there is mountains of evidence (every other industrialized country in the world) that many forms of single payer insurance work quite well (regardless of whether actual health care providers are run by the government).
If a freer market in health insurance will result in better care for more Americans, somebody should be able to give specifics of the mechanism by which insurance companies will cover more people and lower premiums to the point nearly everybody can afford it (and presumably make more profit doing it, since profit motive is the driving force in a free market). You need to do more than claim that the free market always provides more choices.
Published: July 28, 2009 1:55 PM
FTG
Tom Human,
I'm sorry, why does this not follow? Are you seriously suggesting self-insurance is a viable alternative for your health?
The fact is that free market health care has not worked.
Ignoring the fact that your question is loaded, what I am pointing out is Krugman's non sequitur when he argues that "health care MUST be paid largely by some sort of insurance". This does not follow - why must this be so?
Now, let me tackle your question: The problem is that you're basing your thinking on the current system the US "enjoys". The US does not have anything remotely resembling a free market health care system.
The fact that other countries have socialized systems that have not been voted out does not mean anything - it is irrelevant. Nobody has voted out Amtrak, yet this is not a statement of its effectiveness, so why would it be for socialized health care? The way to know how effective or efficient is a system is to find out its costs and compare them to the value they offer, not by how lazy are the voters.
Economies of scale exist for items that are very similar, like tennis shoes, electricity or aspirin, things that lend themselves to mass production. Instead, health care is a more personal service, which means it is better handled by smaller, more localized businesses, in the same manner as plumbing or hair styling.
The fact that other countries have socialized medicine, in itself, means nothing, except the voraciousness of governments. The same can be said about water distribution, normally taken care of by the State - does this mean that water distribution lends itself to be better managed by a central bureaucracy? If so, why not other things, like cup cakes or milk, or lawn mowing?
You talk about costs in a way that makes me think you're just guessing. You cannot say that the health care system of A or B is no more "expensive" than the one in the US, when you do not see all costs behind the service. You have to take into account the other costs besides out of pocket, like the tax burden, waiting times and results. If I pay out of pocket 100 times more than I pay in, let's say, Canada, but by paying 100 times more I stay alive, then what is the advantage of the Canadian system? You may find this as an exaggeration, but the fact is that many Canadians go to the US to have important tests and surgery done, due to the fact that doctors are scarce and their pay is capped.
You want to pay a lot more for an inferior product just because of your "religious" beliefs about economics
I would say it this way: YOU want to receive a dangerously inferior product if it means somebody else foots the bill - which is what socialized medicine amounts to. That is not only uneconomical, it is immoral to fleece others to pay for someone's else health care
Published: July 28, 2009 3:00 PM
Tom Human
Someone with poor reading skills wrote:
""Health Care has risk, so Insurance is necessary [does not follow]"
I'm sorry, why does this not follow?"
You seem to have misread the article, as this claim is never made."
You seem to have misread the page - I am quoting from one of the first comments.
Published: July 28, 2009 3:03 PM
Tom Human
"YOU want to receive a dangerously inferior product if it means somebody else foots the bill"
First, *I'm* the one footing the bill, OK? I earn more than 98% of Americans, I'd be paying. Except I'd be paying *less* than I pay now.
Second, repeating over and over again "Socialized medicine is no good" is no substitute for a logical argument. In what manner is it inferior? I made my arguments above, feel free to refute them with *facts* but just quoting the same old tired rhetoric isn't going to convince anyone.
The fact is that Libertarianism has a lot of good ideas, but is going to end up in the dustbin of history because of its weird obsession that anything government does is intrinsically evil.
In fact, there are many things, like sanitation, utilities, law enforcement, *and health care* that work much better under government than under private ownership.
If you don't believe this, please provide an example of a place where we'd want to live that doesn't have government sanitation, utilities, law enforcement - and health care.
Yes, even the United States has government health care - the USG spends more on my health care per year than Canada ever did AND I pay hugely for insurance through my employer - but it's extremely inefficient because, because rather than saying, "This is an important service and we need to make it work," Americans say, "Government is useless," and allow themselves to be robbed blind as a result.
Government is one of humanity's great inventions. Like any great invention, it has good and bad points but to throw it out altogether is just childish.
Published: July 28, 2009 3:30 PM
Walt D.
The websites www.KrugmanWrong.com, www.KrugmanWrongAgain.com and www.KrugmanWrongAgainAndAgain.com have not been taken. Perhaps mises.org should start a related website. Or at least start a separate blog.
Published: July 28, 2009 3:36 PM
ShedPlant
Tom Human,
You suggested that a preference for free market, rather than a socialised, health care system was "religious" rather than economic.
I don't consider healthcare any different vis a vis production than other goods (shoes, dentristy, IT Consulting etc.). Some libertarians (e.g. Walter Block) also contest that the services you offer (utilities) are better run by the government. Utilities were privatised in the 1980s UK (and telephone in the USA at some point) and it's been a great success. You could make non-economic arguments for compulsory provision of healthcare (good of 'society', whatever that means), but I'm unaware of any convincing argument why, for economic reasons, doctors and patients can't conduct business without central planning.
So, a socialised system:
Cannot calculate rationally (Mises/Hayek information problem) i.e. the bureaucracy cannot guage consumer preferences or react to changes;
Does not have a market system, so cannot properly price goods or services;
Has no competition (or has an unfair advantage by forcing non-customers to pay);
Discourages innovation or customisation, instead favouring a one-size-fits all approach;
Does not operate on the profit/loss system;
Can sustain losses indefinitely without fear of bankruptcy;
Has no incentive to serve consumer demand (instead, obeying health dept. targets/rules);
Encourages limitless demand (since the price is fixed at zero);
Disincentivies healthy habits (since healthcare is 'free'), further increasing demand for services;
Is forced to ration services by queues/waiting times.
And that's just what I thought up in a few minutes. There will also be unintended consequences, and I'm sure much more has been written on the subject. But to claim that the concerns against cental planning are wholly irrational "religious" or dogmatic, rather than valid economic concerns, is disingenuous or ignorant.
Published: July 28, 2009 4:53 PM
dmitry
Tom Human
"If you don't believe this, please provide an example of a place where we'd want to live that doesn't have government sanitation, utilities, law enforcement - and health care."
Do you have a mouse in your pocket?
Published: July 28, 2009 5:06 PM
BioTube
Funny, where I live the government-run utilities and sanitation are all inferior to the private option - Austin Energy charges an arm and a leg(and's planning to make everybody pay the green energy surcharge), the city garbage company charges extra for extra cans(whereas the private one we use even allows you to set out bulk whenever you want) and city wastewater is charged based on an average computed once a year. Face it: governments always do worse.
Published: July 28, 2009 5:25 PM
Francisco Torres
Tom,
First, *I'm* the one footing the bill, OK? I earn more than 98% of Americans, I'd be paying. Except I'd be paying *less* than I pay now.
Tom, really, *I* don't want *YOU* footing the bill, because it is immoral. If you want to subsidize someone's health care, go right ahead, but the point is that it should not be done because of any arm twisting from my or anybody's else part.
Second, repeating over and over again "Socialized medicine is no good" is no substitute for a logical argument. In what manner is it inferior?
Repeating over and over again the same STRAWMAN is no substitute for reasonable debate, Tom. The reasons it cannot work have been exposed many times over by Ludwig von Mises (in "Socialism", "Bureaucracy"), Murray Rothbard ("Man, Economy and State"), but again, here it goes:
Socialized medicine, meaning a centrally controlled
health service system, cannot work in the same manner as a private system because of the economic calculation problem, that is: bureaucrats cannot know the true costs of their decisions since they are not risking their own resources - they will not submit to the profit/loss test for economic efficiency, nor will they rely on market prices to learn their costs. Their decisions are mandated by expediency, quotas, and then size of their budgets. Private individuals make decisions based on their opportunity costs, on market forces, on time preference. This is no rhetoric - the empirical facts are there: Bureaucracies HAVE demonstrated their incapacity to manage scarce resources.
I made my arguments above, feel free to refute them with *facts* but just quoting the same old tired rhetoric isn't going to convince anyone.
No, what's going on is that you are convinced of the socialist system, and are not willing to even entertain counterarguments - you simply lump all sound economic arguments under a single strawman.
The fact is that Libertarianism has a lot of good ideas, but is going to end up in the dustbin of history because of its weird obsession that anything government does is intrinsically evil.
Any person that uses aggressive coercion for attaining a goal is evil. Since government IS institutionalized coercion, government cannot be anything BUT evil. If government instead tried to discuss and persuade, in a totally voluntary way, it would NOT be evil but, then again, no different than private charities, so what's the real need to have a government?
In fact, there are many things, like sanitation, utilities, law enforcement, *and health care* that work much better under government than under private ownership.
That is only your opinion. You have no way to compare a public and private system to then make such a conclusion, since the government unilaterally took over some utilities, law enforcement and health care.
If you don't believe this, please provide an example of a place where we'd want to live that doesn't have government sanitation, utilities, law enforcement - and health care.
Most farms do not have utilities given by the government, and yet they get by quite nicely (they have septic tanks, water wells, and electricity is still privately owned in the US, or they rely on stand alone, alternative systems). I can say that country living is nothing short of idyllic. The first law enforcement in the country farm is the 12-gauge shotgun, and there are still country doctors - all private.
Government is one of humanity's great inventions. Like any great invention, it has good and bad points but to throw it out altogether is just childish.
You have little understanding of where governments come from and how they were formed. You should read more history - governments were born out of the blood of many innocents. It is a great invention, indeed - for politicians.
Published: July 28, 2009 5:49 PM
ShedPlant
Language, the plough, money and electricity were far better inventions than organised crime, in my opinion.
Published: July 28, 2009 6:01 PM
Florian Kren
"Effectively, what all of this is is "comparison shopping that relies on experience"."
"But, once I follow the expert's advice, I am capable of evaluating whether it worked - in as far as I care as a consumer."
This is to some extent a fallacy, because it assumes, that one is able to determine cause and effect in ones own health. Since health of a human being is rather complex and keynesians fail so miserable in connecting cause and effect in economics, which is also complex, this assumption is liekly to be untrue under some circumstances. This is part of the reason for the phenomena of placebo effect.
But this does not destroy the whole argument for 2 reasons:
First if one makes such a wrong connection between cause and effect happens, it is likely that the patient himself suffers, so at least the one responsible fells the consequences.(e.g. chemo against cancer since 3 years, no improvement. Then some homeopathic are taken in addition and improvement happens and patient concludes that chemo doesn't help and homeopathic are way to go. Then next cancer no chemo is done only homeopathic and patient dies, because what really happened was that chemo just took 3 years to help with the cancer and homeopathic were useless.)
And second, while placebo can fool the individual it can be accounted for in scientific studies. Since it the claim, that the offered treatments have no real positive effect except to feel good, would be bad for business, companies would have an incentive to check whether or not some treatments are only placebo, they would fund such research. Especially insurance companies, who prefer to pay only for what is absolutely necessary for customers health, would make sure that they know which are palcebo treatments and which arent.
(Doesn't mean, that they wouldn't offer payment for such treatments, since some patients want treatments even if they are not scientifically verifiable)
Published: July 29, 2009 5:27 AM
Gil
Meh. How can anyone come up with the conclusion that charity will always magically fill up the gaps?Alternatively, why not simply say that there are a great many people who are getting medical treatment when they shouldn't?
Published: July 29, 2009 6:31 AM
Michael Wagner
It continues to amaze me that so few people remember a time when we actually had a "health care system" that worked.
I personally remember a time when my family had health insurance that was affordable and actually performed as advertised. (Not to say it was perfect, but it worked and probably would have worked better had there been fewer, or no, government regulations involved.)
It was a very simply system called "major medical insurance." If you got sick, you went to the doctor. He did his tests, gave you the treatment and you paid the bill. You then submitted the bill to the insurance company and a week later you got a check. There was a reasonable deductible and a "disappearing" co-pay. (If the total expense for the year exceeded a certain amount, the company paid 100%.) There was always some "out of pocket" expense, but that served to prevent trips to the doctor for trivial illnesses.
In-hospital coverage was 100% if the hospital was "participating." (Most hospitals were.)
All in all, I was very satisfied with the care my family received and the insurance system.
All this, of course, was before Congress "fixed" healthcare with the HMO act of the 1970s.
Published: July 29, 2009 6:47 AM
Tom Human
"The time when healthcare worked."
Things have changed dramatically in medicine since 1970 - it's nothing to do with "Congress".
For one, there was the establishment of a national-wide network of trauma centers. These are amazing things - if you have an accident and they get you in there alive, they can probably save you no matter how injured you are.
This has saved literally millions of American lives, typically of people in their prime. But this sort of protection doesn't come cheap.
Consider treatments for things like cancer. In 1970, cancer was quite likely a death sentence - now we have amazing treatments for cancers, Hodgkin's, leukemia, etc. that often have survival rates in the 90% range. Again, at a price.
Hip replacements, prenatals, the list is almost infinite. The results are a longer, healthier life - but at a great cost.
Congress had nothing to do with. You are simply getting a lot more medicine. And most of that medicine is extremely useful.
Published: July 29, 2009 10:37 AM
Tom Human
""In fact, there are many things, like sanitation, utilities, law enforcement, *and health care* that work much better under government than under private ownership."
That is only your opinion. You have no way to compare a public and private system to then make such a conclusion, since the government unilaterally took over some utilities, law enforcement and health care."
Please look around you. Please look at a history book.
There are many areas in the world today where the government does not provide sanitation, utilities, law enforcement, and health care. I have seen some of them from afar. They are in Africa and in South America and Asia.
I assure you, you would not want to live in these places.
Look at any time and place in the past, before the establishment of these government services - those were unhealthy, dangerous times where the vast majority of individuals led miserable, sickly, fearful lives.
Regarding "farmers", I do agree that if you go back further, you get to an early pre-city, pre-specialization civilization where things were actually pretty good - small numbers of humans lived in large areas of land and could fend for themselves with only a few hours' work each day. But that was a long time ago. There are simply too many people for more than a fraction of them to be agrarian - unless there's a collapse, most of humans will live and die in cities for the rest of time.
And even your farmer uses roads, electricity, cable TV and wants that expensive trauma center when he gets into an accident.
Overall, I see no refutation of my argument here.
1. the current US health care system is terminally broken.
Does anyone dispute this? If you like, I can provide as many statistics as you like showing that the US delivers a lot less health care for a lot more money than any other system in the world. We simply aren't getting enough product for our money - and a lot of people aren't getting any product at all.
2. The socialized system of medicine as practiced in Canada and Scandinavia is objectively extremely successful and effective.
Let's look at Canada, for example. They have an additional wrinkle: they have 10% of the US population in the same area - and in the north they have the great challenge of delivering health care to the native peoples who live scattered and start with poor baseline health.
The fact is that not just objective statistics but near-universal acclaim by its users show that the Canadian system overall beats the US system by a substantial margin - it delivers more health care, cheaper, and more effectively.
As in any system, there are specific cases where the distribution of health care in the Canadian system is suboptimal - overall, it delivers brilliantly and effectively. Canadian medical research is world-class - when Paul Tsongas mocked the Canadian medical system because it would not have treated his cancer, it came out that the treatment that he had gotten had been invented in Canada, and was freely available there to anyone sick enough - but Tsongas was one of the very few Americans who'd gotten this - because he was a Senator!
Effectiveness trumps everything else. We should dump the current, broken system, look at all the other health systems in the world, and copy the ones we think work best.
Published: July 29, 2009 11:18 AM
Mibu Clan
At Tom Human
It is also Government which places extreme restrictions on free choice regarding health, such as the know and accepted FACTS of MArijuana use (along with the rest of the drugs, which are so heavily deemed evil and yet are so happily accepted through prescriptions, Marinol? Oxicodon?)
Not to mention abortion...
All this on top of devaluing the money YOU WORK FOR, and your SAVINGS FOR THE FUTURE?
Indeed, fuck that shit.
Im no anarchist of Free Market Capitalist, but in the end every Government Beuracratic system is full of fail and becomes annoying, long paprerwork with useless routine steps and ever higher costs.
Published: July 29, 2009 12:31 PM
ShedPlant
Tom Human,
You completely ignored the economic arguments against socialised provision of goods. If you don't understand them, my first introduction to the information problem was F.A.Hayek's Road to Serfdom, so you might want to give that a try.
OK, let's look at your huge mistake of cause and effect here:
"There are many areas in the world today where the government does not provide sanitation, utilities, law enforcement, and health care. I have seen some of them from afar. They are in Africa and in South America and Asia.
I assure you, you would not want to live in these places.
Look at any time and place in the past, before the establishment of these government services - those were unhealthy, dangerous times where the vast majority of individuals led miserable, sickly, fearful lives."
These are all uncapitalistic societies or in very early stages of capitalist development. Sure, without a long period of division of labour, upholding private property rights and capital accumulation, human life is nearly unbearable. After all, to quote Mises:
"Nature is not bountiful but stingy. It has restricted the supply of all things indispensable for the preservation of human life. It has populated the world with animals and plants to whom the impulse to destroy human life and welfare is inwrought. It displays powers and elements whose operation is damaging to human life and to human endeavors to preserve it. Man’s survival and well-being are an achievement of the skill with which he has utilized the main instrument with which nature has equipped him — reason."
The reason these societies have a lower standard of living and healthcare, sanitation etc. than in developed nations has nothing whatsoever to do with whether or not their government is providing health services. After all, government creates nothing! There is not enough wealth in the society to be able to create/afford decent medical care, whether privately or socialised. Treating cancer and inventing MRI machines are far lower down on the preferences of human wants than finding clean drinking water or growing crops in the poor African climate. It is ludicrous to suggest that, in a pre-capitalist society like parts of Africa, high-quality healthcare could be provided to the citizenry merely by government fiat. Where could it get the resources, and what other sectors of the economy would suffer from the diversion of resources, assuming they could be found?
In short, the reasons some parts of the world have a low standard of living has nothing to do with the (lack of) benevolence services created out of government magic. It has only ever been possible for the government to take over these services *after* they have already occured on the market. Only a wealthy developed society could possibly have any utilities worth nationalising.
"Regarding "farmers", I do agree that if you go back further, you get to an early pre-city, pre-specialization civilization where things were actually pretty good - small numbers of humans lived in large areas of land and could fend for themselves with only a few hours' work each day."
Oh, so you're a primitivist! "Things were actually pretty good" - long intensive labour just to subsist on terrible food, with an unimaginably low quality of life in every sense, practically no leisure, terrible life expectancy, vulnerability to any natural disaster, illness or poor harvest, no education, a tiny fraction of the world population possible today. "Pretty good"?!
Mises again: "A return to the Middle Ages is out of the question if one is not prepared to reduce the population to a tenth or a twentieth part of its present number and, even further, to oblige every individual to be satisfied with a modicum so small as to be beyond the imagination of modern man."
Back to healthcare (by the way, I think it's funny the way you wrote "Congress" in inverted commas). I'm sure health care technology has improved in the last thirty years, but in a free market (computers, for instance), you'd also expect costs to go down or stay the same for an increasing quality. And even if some healthcare treatments were, in general, more expensive, it still doesn't justify central planning, for the economic reasons mentioned above and explored in more detail by writers of the Austrian school. Why would individuals not - in a free market - be willing to pay higher costs for a better quality of care, or perhaps receive a lower standard of care to fit their budget? Higher quality healthcare (which is, by the way, created by private health companies, not government) in no way leads to a conclusion of market failure and government takeover.
Then, of course, there's the ethical problem, which you clearly didn't understand when you said "*I'm* the one footing the bill, OK?". Whether you personally approve of the system you propose is completely irrelevant, since that system requires forcing everyone to pay for it and use it, regardless of whether they want it or not. In other words, your approval for the socialist system in no way justifies the use of force against those who do not with to participate.
Then there's the ethical issue of control. When the government has the responsibility for the nation's health, they try to change the people's health habits and choices. Whereas in a free society a smoker, drinker or obese person would be responsible for his own health, now the government, finding itself unable to convince these people to change their habits, punishes and restricts these lifestyle choices. Should smokers be allowed to use the health system, considering they put their own health at risk? Should the public health system fund non-urgent procedures like plastic surgery, breast implants, fat removal etc.? These are all now political issues involving the rationing of care that would never come up in a free system.
Published: July 29, 2009 6:21 PM
Gernot Hassenpflug
From my experience:
Evasion of responsibility & refusal to treat patients become an increasing factor when medical systems become socialized and the number of alternatives are reduced: in Japan, for example, it is quite common for hospitals, fearing that a patient death would jeopardize their public ratings, refuse to treat patients for whom the results of treatment are difficult to predict accurately---for example, kidney stone treatment.
Another factor is that a culture of bureaucracy which hereby develops consequently makes it impossible to reverse a previous prognosis and get a "second" opinion, let alone change hospitals if treatment at a particular one proved less than satisfactory.
The solution to the above problems is to have one's treatment outside the country, which of course is massively more expensive: not only does one continue to pay the irrelevant medical tax of the country of residence, but one's costs in the country of treatment cannot be covered under any local "socialized" medical tax there.
The system works, if that term can be used, by faking a change from variable incomes to fairly constant incomes and thereby making beneficiaries (medical establishment workers) feel more secure by providing steady income streams for standardized procedures, which are naturally promoted and the system expanded step-by-step into greater and greater detail until it becomes entirely bureaucratic (lookup of procedures to apply) and entirely un-customized to the needs of a particular patient. The illusion that the human body can be categorized as a simple system is the same illusion as that applied by predictive economics to the national economy.
Published: July 29, 2009 9:47 PM
Jonathan Wyse
Some thoughts regarding the health insurance market, and how to foster competition in light of the imperfections currently present - using market-based solutions. Thoughts welcome!
http://thefreemarketeers.wordpress.com/2009/07/30/marketing-health-care/
Published: July 29, 2009 10:10 PM
Evan
Wow- took me an hour to read through all of this- I really like some of the comments here and thoughts and I have a few arguments to add. Far up the page by Lucas E., the discussion came to game theory and a point was made that a rich man and a poor man could walk up to a poor man and interact but we really don't see that in reality. Usually people with money don't interact with people in a much lower class level and vice-versa in a very meaningful way usually. Especially if you consider about the extremes of wealth in our society (which has grown more by the way in recent years) so you could consider that both cannot communicate effectively to each other if at all.
Another point I want to make is that many people who have posted against government intervention/funding/etc. make the point that health care in America does not operate in a free-market. But I have to make the point that it isn't the government that doesn't make it a free market its because numerous individuals with a lot of leverage and whom do have regular and effective communication between them fix the "free-market" in their favor. The fallacy of free-market is that people on all levels are informed and have equal opportunity/entry to market- it doesn't. People at the top of these companies talk to people at other companies and come up with ways to prevent a free market. There has been a lot of excellent books written on this and its obvious. What government tries to do is keep the ideals of free market through anti-trust and laws written in pencil to adapt to fraud and other unfair practices. It is ideally what the government is charged with doing. So saying that the government makes things unfair in a free market is a little ridiculous. Which reminds me, someone made another point that government cannot change and adapt like companies do... which is also a little ridiculous. If anyone has ever worked for a major corporation you run into the same kind of bureaucracy you do in a large government. Its almost a mirror image... I know I've worked in both. It also a ridiculous statement because governments do change all the time... every election every 2 years in the US or even less depending where you go: city council, mayor, state rep, senator, president, etc. They change just like the market changes- through people that may or may not know what they are buying or electing. Its true in both that most stock holders don't know enough about the company they invest in as much as in how much people know enough to decide foreign or economic policy.
This rant is unpolished and I apologize but the fact is no one is talking about doing away with private insurance and the point is that a public plan by the government is supposed to keep things fair and in check.
One last point to any Christians out there... there was some talk about it not being fair to have to pay for other people and they believe property is a god given right. Wasn't it Christ who believed in the better health spiritually and physically especially to those who couldn't get it. Isn't greed a sin? If god thinks you have a right to property then why does god "giveth and taketh away"? I just mention that not out of spite but as a serious metaphysical tangent that I go on every time I see one of those idiot christian conservatives go on a rant against "evil godless socialist liberals".
Published: July 31, 2009 10:57 PM
Mike S.
In response to your quote, " Insurance companies - in a free market - would be under precisely the same pressure. If they refuse to pay when they obviously should, then they will lose customers and develop a bad reputation. This encourages insurance companies to actually pay when they are contractually obligated to," I can only ask if you've ever heard of asymmetry information. Do you really think that average consumers have the time, skills, and inclination to examine every healthcare plan that might be available to them in an informed way? Choosing the right insurance plan involves actuarial analysis on the consumer end as well as the insurer end. Also, policies can have many complex contingences regarded the payment of claims. Ask around and find out how many people actually know the detailed nature of their healthcare policies.
Also, it can easily be cheaper for an insurance company to drop several policy holders to avoid paying for even one high cost one. What good would keeping ten premiums coming in be if the company has to pay out tens or even hundreds of thousands of dollars for an expensive claim?
The problem with every Austrian economics proponent I've seen is that you don't check numbers. You just make assumptions, based on other assumptions about how free markets work. Well, free markets are based on the actions of people and people are systematically irrational in many senses economically and financially. Hence, economic frameworks must be based on observation, not a priori ideas.
Published: August 3, 2009 3:55 AM
Thinker
"The fallacy of free-market is that people on all levels are informed and have equal opportunity/entry to market- it doesn't. People at the top of these companies talk to people at other companies and come up with ways to prevent a free market. There has been a lot of excellent books written on this and its obvious."
Your point is that trusts "prevent" a free market has been disproved both a priori and historically. Even if all the companies in a given industry are in perfect collusion, without government interference, a new entrepreneur or company is free to gather capital and enter the industry, which then provides competition. Therefore, a trust cannot restrict a free market; only government can do that. That is why "monopoly" meant, before the modern linguistic perversion, a grant of special privilege from the government. Your point is not at all obvious.
"What government tries to do is keep the ideals of free market through anti-trust and laws written in pencil to adapt to fraud and other unfair practices."
How exactly does government breaking up or fining arbitrarily large companies, with the maximum size of these companies determined on a case-by-case basis, "keep the ideals of [the] free market"? This is not at all a free market, but rather a market where the rules are ever-changing and based on an absurd criterion-that business can restrict competition without government assistance. And any "unfair practices" other than fraud and aggression are unfair only according to an arbitrary value standard. In a free market, all exchanges must be mutually beneficial for them to occur.
"Also, it can easily be cheaper for an insurance company to drop several policy holders to avoid paying for even one high cost one. What good would keeping ten premiums coming in be if the company has to pay out tens or even hundreds of thousands of dollars for an expensive claim?"
In that case, someone with sufficient capital should be able to tap into this demand from disaffected policy holders from other companies...that is, unless the government saddles them with various fees and bookkeeping requirements, which it does.
"free markets are based on the actions of people and people are systematically irrational in many senses economically and financially. Hence, economic frameworks must be based on observation, not a priori ideas."
That people do not always make the decisions that will lead to the optimal fulfillment of their desires does not mean they are irrational-it means they are fallible. The fact is that a priori reasoning yields correct conclusions, whereas a posteriori reasoning has no such guarantee. Of course, all knowledge is built upon knowledge previously gained, so Austrian economics proposes to rely on a posteriori reasoning as little as possible, purely for the ascertainment of axioms regarding human behavior that can be used to draw conclusions a priori that most accurately reflect reality.
Published: August 3, 2009 5:53 AM
Lucas M. Engelhardt
In response to your quote, " Insurance companies - in a free market - would be under precisely the same pressure. If they refuse to pay when they obviously should, then they will lose customers and develop a bad reputation. This encourages insurance companies to actually pay when they are contractually obligated to," I can only ask if you've ever heard of asymmetry information.
Yes, I have. As a graduate student in economics, I have heard of this. I plan to teach it this quarter, too, for that matter.
Do you really think that average consumers have the time, skills, and inclination to examine every healthcare plan that might be available to them in an informed way?
This one is a non-starter. Problem: your definition of "informed". I would actually say that the answer to this is "yes", because I judge "informed" subjectively. That is: does the person have sufficient information to choose between their alternatives? The quantity of information required for this is quite small. In fact, perhaps even zero.
On the other hand, judging from later parts of your comment, you're treating "informed" as equivalent to "functionally omniscient". At which point, I agree. Consumers are not - and never are - omniscient. However, with that definition, individuals must, therefore, be incapable of freely choosing anything, because there is always relevant information that they do not know. I'm guessing that this "proves too much".
If this is not what you mean by "informed", then please tell me what you mean - and do so with enough precision that we can reason with it.
Choosing the right insurance plan involves actuarial analysis on the consumer end as well as the insurer end. Also, policies can have many complex contingences regarded the payment of claims. Ask around and find out how many people actually know the detailed nature of their healthcare policies.
Actually, I don't have to ask around. I'm quite confident that I don't know all the details of my own healthcare plan. However, that doesn't mean that I made the "wrong choice" - even if it ends up having some undesirable properties.
Why? Because of something called "information costs". If it is (subjectively) costly to obtain and process information, then it makes sense to make a relatively "uninformed" decision. This is actually what consumers do all the time. For example, I don't check the nutrition label every time I buy Triscuits. In fact, I don't recall ever checking it. But, that's because knowing that information is relatively unlikely to make a difference in my choice, so obtaining that information is more trouble than it's worth. Of course it's true that, in the absence of information costs, I'd make a better decision (because it would be optimal to gather all information). But, information costs are most definitely not absent.
Actually, what I'd expect to happen is that there would be health insurance agents who would match your desires as a consumer to a policy that fits your needs. This minimizes information costs by having someone deal with the information who is used to dealing with that information. Right now, I do not know of any health insurance agents - but that could just be my own ignorance... another application of information costs!
Also, it can easily be cheaper for an insurance company to drop several policy holders to avoid paying for even one high cost one. What good would keeping ten premiums coming in be if the company has to pay out tens or even hundreds of thousands of dollars for an expensive claim?
This makes little sense. Suppose that an insurance company is confident that 10% of a particular population will get a disease that costs a lot of money. Then, sensibly, they would offer a premium that is more than 10% of the cost of treatment. That way, when you insure 10 people, they get revenues that are more than the cost of treatment - but they only have to pay the cost of treatment. It's obvious that this is a better option than not covering the group at all (profit is better than "no profit"). So, you're going to need a more convincing argument why this would happen. (Such an argument may exist - but you haven't yet given it.)
The problem with every Austrian economics proponent I've seen is that you don't check numbers.
Here, you're obviously wrong. Austrians do check numbers. Most of Bob Murphy's posts have lots of good macrostatistical content, for example.
You just make assumptions, based on other assumptions about how free markets work.
Out of curiosity, aren't you making even stronger assumptions about how markets should work? (the implicit assumption that "a rational consumer must have all relevant information.")
Well, free markets are based on the actions of people and people are systematically irrational in many senses economically and financially. Hence, economic frameworks must be based on observation, not a priori ideas.
This last paragraph was a marvelous argument against, say, standard neoclassical consumer choice theory. In fact, I agree with it as a very rough critique of that. However, Austrian economics does not make assumptions that are anywhere close to as strong as those in neoclassical consumer choice theory. Our basic assumptions are much more limited - and are also obviously - and often undeniably - true. Most importantly:
(1) Humans act.
(2) Preferences are inherently subjective, and are only made observable through objective action.
(3) Costs are inherently subjective. (including, say, information costs)
These are actually enough to show that a free market is the way to go. If preferences are inherently subjective, then the only way to even get close to satisfying consumer preferences is to allow consumers to make free choices. Anything else is groping about in the dark. If costs are also inherently subjective then offering freedom to producers is also the way to go, as only producers themselves can know the true - subjective - costs of production. If we throw in the assumption that "more of a good is preferred to less" (in action! That is, "3 units" will be CHOSEN over "2 units".), we can show that consumers are willing to pay more for something the higher the preference for it is. And, simultaneously, we provide the incentive for entrepreneurs to serve consumer desires. (Since entrepreneurs also want "more" - profit, in a loose sense - they must serve consumer desires to get it. Through experimentation, they can find what goods and what quantities of production provide them with more profit.)
Honestly, that is what the basic argument for the market relies on and comes down to. Obviously, there are twists and turns here and there. But, this is the basic argument. In order to defeat it, one has to attack the assumptions. So, one must deny that preferences are subjective, that costs are subjective, or that more is preferred to less. Alternatively, one can point out other assumptions that I made, but failed to recognize. Obviously, feel free to do so. That's how intellectual dialogue works.
Published: August 3, 2009 7:10 AM
Byron Van Buren
If you follow von Mises or Marx, you believe economies are reasonable, idealistic and logical systems. However, economic systems are not rational systems. They are not machines. They are run by irrational emotional human animals. An economy is like a club house where people decide to pool their resources together for the common and the individual good because two or three heads is better than one. The best State has a harmony of teamwork and pooling (taxes and gov't services) and individual enterprise. All strong gov'ts today have strong central gov'ts that support the group or the citizens. Failed States, whether Socialist or Free Market, fail because the People did not come first.
Published: August 6, 2009 3:48 PM
Mike S.
"Do you really think that average consumers have the time, skills, and inclination to examine every healthcare plan that might be available to them in an informed way?
This one is a non-starter. Problem: your definition of "informed". I would actually say that the answer to this is "yes", because I judge "informed" subjectively. That is: does the person have sufficient information to choose between their alternatives? The quantity of information required for this is quite small. In fact, perhaps even zero.
On the other hand, judging from later parts of your comment, you're treating "informed" as equivalent to "functionally omniscient". At which point, I agree. Consumers are not - and never are - omniscient. However, with that definition, individuals must, therefore, be incapable of freely choosing anything, because there is always relevant information that they do not know. I'm guessing that this "proves too much"."
Omnicience has nothing to do with this discussion. The question is whether consumers actually know the many details of their own coverage to understand the likely implications given their unique genotypes and phenotypes, and circumstances. While you can argue that you can maximize your utility by selectively choosing to be willfully ignorant of some details of daily living, this does not mean you are not a victim of the complexity of the world we live in. Since you don't know your own health insurance plan that well, how do you know that certain treatments for problems that you are actuarialy expected to have are covered? Some people find out all too late, when it's most costly. Adn how do you address the well-known cognitive biases that people employ irrationally in their decision making? I refer specifically to the work by Kahneman and Tversky, among others. Consumers tend to discount small probabilities, given a certain reference frame, and overweight the need for coverage for higher probability events. This increases the odds for systematic, psychophysical failures to properly cover against "black swans."
"Actually, what I'd expect to happen is that there would be health insurance agents who would match your desires as a consumer to a policy that fits your needs. This minimizes information costs by having someone deal with the information who is used to dealing with that information. Right now, I do not know of any health insurance agents - but that could just be my own ignorance... another application of information costs!"
You have to obtain certain licenses to advise on insurance matters in many states and those with such licenses can make much more money by selling policies, rather than simply providing information to consumers. This doesn't mean it's impossible to find a way to make this economical, but I've never seen evidence such a service exists. Even if it did, insurance companies could start having their agents perform this service, with conflicts of interests. This sort of thing happens with mega banks all the time. Analysts and advisors issue recommendations that are not good for their retail customers, but pump up the capital to their investment banking clients. This has gone on for decades, and consumers still fall for it.
Unfortunately, consumers are mostly stupid. you can argue to the contrary if you like, but just look around you. Look at what sells and what problems get ignored.
"The problem with every Austrian economics proponent I've seen is that you don't check numbers.
Here, you're obviously wrong. Austrians do check numbers. Most of Bob Murphy's posts have lots of good macrostatistical content, for example."
Well, let's take the temporal misallocation of capital, which, if I understand correctly, is a central assumption in Austrian business cycle theory. The idea is that artifical interest rates will change the temporal dynamics of capital investment, skewing it toward relative inefficiency, ultimately leading to over-investment in some sectors and eventual crash. Is there any data to support this assumption, if I have it correct?
"(1) Humans act.
(2) Preferences are inherently subjective, and are only made observable through objective action.
(3) Costs are inherently subjective. (including, say, information costs)
These are actually enough to show that a free market is the way to go. If preferences are inherently subjective, then the only way to even get close to satisfying consumer preferences is to allow consumers to make free choices. Anything else is groping about in the dark. If costs are also inherently subjective then offering freedom to producers is also the way to go, as only producers themselves can know the true - subjective - costs of production. If we throw in the assumption that "more of a good is preferred to less" (in action! That is, "3 units" will be CHOSEN over "2 units".), we can show that consumers are willing to pay more for something the higher the preference for it is. And, simultaneously, we provide the incentive for entrepreneurs to serve consumer desires. (Since entrepreneurs also want "more" - profit, in a loose sense - they must serve consumer desires to get it. Through experimentation, they can find what goods and what quantities of production provide them with more profit.)"
Subjective preferences can be modeled objectively. I do it all the time. For example, learning can be modeled in a number of ways. I chose stochastic equations, modeling generalization, discrimination, symmetry, transitivity, and blocking. I model net motivation (utility) by relating the required net rate of intake of various resources (calories, for example) to the basline rate and the objective stimulus value. Marginal benefit equals marginal costs, etc. Hence your assumptions about pure subjectivity are false.
Published: August 6, 2009 4:02 PM
Lucas M. Engelhardt
Omnicience has nothing to do with this discussion. The question is whether consumers actually know the many details of their own coverage to understand the likely implications given their unique genotypes and phenotypes, and circumstances.
Which is why I said “functionally omniscient” – by which I mean that consumers possess all relevant information. Which seems to be what you mean here. Correct me if I’m wrong – then let me know exactly what you mean, if you don’t mean that.
While you can argue that you can maximize your utility by selectively choosing to be willfully ignorant of some details of daily living, this does not mean you are not a victim of the complexity of the world we live in. Since you don't know your own health insurance plan that well, how do you know that certain treatments for problems that you are actuarialy expected to have are covered?
A question for you: if the problem is complexity, why is there no demand for simplicity? One would think that if there is a preference for simplicity (and I agree that there probably is) that consumers would be willing to pay a premium for a simple plan rather than a more complex one.
I’d suggest that there is a demand for simplicity, but that the health insurance market is so regulated that simplicity isn’t legal. Result: we have a (hampered) market that is very bad at fulfilling consumer desires.
A very simple insurance plan is certainly conceivable. For example, the insurance company could charge a fixed monthly premium and agree to pay all of my medical expenses for a year. Then, all I have to estimate is what I believe to be my likely total expenses. Naturally, I may make errors, but that’s just part of reality. So, why don’t we see simple plans like this?
Some people find out all too late, when it's most costly. Adn how do you address the well-known cognitive biases that people employ irrationally in their decision making? I refer specifically to the work by Kahneman and Tversky, among others.
Careful. The problem here is that you’re accepting the neoclassical definition of “rationality” – but there is no reason to use “irrationality” as a “guilty” verdict against consumers, that condemns them to lose their right to choice. Perhaps preferences aren’t stable, transitive, independent of framing, etc. The question is: do these facts really need to be “addressed” by policy?
Now, I agree that they should be “addressed” by theory. However, the assumptions for the Misesian theory of preference are so weak that they are perfectly consistent with the findings of the behavioral economists. Personally, I think the findings of behavioral economists are a marvelous critique of standard neoclassical theory. However, it does not then follow that they are a good ground on which to build a theory of preference.
Consumers tend to discount small probabilities, given a certain reference frame, and overweight the need for coverage for higher probability events. This increases the odds for systematic, psychophysical failures to properly cover against "black swans."
Here’s a problem. This statement is not systematically true – at least if my reading of the literature is true. Now, it may be true most of the time. But, there is the “law of small numbers” that leads to people (“irrationally”) refusing to fly in airplanes after a terrorist attack because they grossly overestimate the odds of a low probability event. You see similar actions quite a bit. People buying lottery tickets because they know someone who won the lottery, and so on.
This is a good example of why I think behavioral economics does not provide a good, consistent foundation for theory. You get contradictory claims. On the one hand, people underweight low probability events. On the other hand, they overweight them. Why not just acknowledge that people make mistakes because information is not perfect? However, people do have an incentive to work toward correcting the more grievous errors, and therefore will do so. (For example, I’d be willing to bet that calling attention to, say, anchoring, makes people less likely to engage in it – or at least likely to engage in it less severely. If I were an experimental economist, I’d run experiments on that one.)
You have to obtain certain licenses to advise on insurance matters in many states and those with such licenses can make much more money by selling policies, rather than simply providing information to consumers. This doesn't mean it's impossible to find a way to make this economical, but I've never seen evidence such a service exists. Even if it did, insurance companies could start having their agents perform this service, with conflicts of interests.
Actually, these types of services are provided in other insurance markets. For example, my auto insurance agent is independent, and works with a lot of different insurers. So, she looks for which gives me the best deal. Also, some insurers (Progressive) give information about their competitors, so that they are more likely to get the contact with the customer.
This sort of thing happens with mega banks all the time. Analysts and advisors issue recommendations that are not good for their retail customers, but pump up the capital to their investment banking clients. This has gone on for decades, and consumers still fall for it.
On occasion, people make mistakes. The question is: can we set up a system that is actually any better?
Unfortunately, consumers are mostly stupid. you can argue to the contrary if you like, but just look around you. Look at what sells and what problems get ignored.
In order for this statement to have any “teeth”, we’d have to come up with an alternative system that is better than letting consumers make choices for themselves. I’m curious where you’re going to find the benevolent geniuses to make everyone’s choices. Sadly, Plato’s philosopher-kings are few and far between.
[L]et's take the temporal misallocation of capital, which, if I understand correctly, is a central assumption in Austrian business cycle theory. The idea is that artifical interest rates will change the temporal dynamics of capital investment, skewing it toward relative inefficiency, ultimately leading to over-investment in some sectors and eventual crash. Is there any data to support this assumption, if I have it correct?
Which assumption do you mean precisely? As far as watching the process unfold, it’s not hard to point out the most recent housing bubble (which Austrians identified, and many economists missed). Very low interest rates post-9/11 led to investment in housing that shouldn’t have happened. When interest rates moved back up, these investments were revealed as erroneous.
Subjective preferences can be modeled objectively. I do it all the time.
How can you identify someone’s preferences if you don’t actually observe people act? Now, it may be that you can come up with a model for their preferences – but that model can’t be tested unless you have some observable data. And you can’t get any reliable observable data on preferences unless you observe people actually making choices.
Published: August 6, 2009 10:08 PM
Pravin
"I chose stochastic equations, modeling generalization, discrimination, symmetry, transitivity, and blocking. I model net motivation (utility) by relating the required net rate of intake of various resources (calories, for example) to the basline rate and the objective stimulus value. Marginal benefit equals marginal costs, etc."
This is poor scientific method .If human behaviour were stochastic, there would be no use for 'research' work. If people dont learn from research,then why do research?.Human behaviour is absolutely not stochastical -behaviour changes all the time. Human behaviour is action under uncertainty. You need to read Rizzo to understand why stochastic modeling is bogus in economics.sorry mate, you've been had by economists with physics envy.
Published: August 7, 2009 7:57 AM
Mike S.
"Which is why I said “functionally omniscient” – by which I mean that consumers possess all relevant information. Which seems to be what you mean here. Correct me if I’m wrong – then let me know exactly what you mean, if you don’t mean that."
Functional omniscience is also irrelevant. Most people don't know how to deal with abstract uncertainty. Merely processing information more efficiently would help.
More importantly though, why aren't there very simple medical insurance policies? Perhaps because there aren't incentives to offer them. For one thing, they might be much more expensive in some ways, especially if the cost of simplicity is giving up exclusions based on pre-existing conditions, or likely need for expensive treatment. While the prices for healthcare is very inelastic for known problems, it is not always so for unanticipated problems, which is what insurance is for. Despite the inelastic demand, prices for such policies could be so high that few can afford to pay, whatever their demand inelasticity.
On the other hand, policies with exclusions are cheaper, but still very expensive? Why? Sure, some misguided government policies might be partially to blame. But, why would insurance companies want insurance to be cheap? Wouldn't it make sense for them to set a price that is as far above the cheapest price possible, while not exceeding the ability of too many consumers to pay? Notice that they often recruit government in these efforts, as insurance companies actually favor an Obama-style plan that doesn't have the public plan option.
"Careful. The problem here is that you’re accepting the neoclassical definition of “rationality” – but there is no reason to use “irrationality” as a “guilty” verdict against consumers, that condemns them to lose their right to choice. Perhaps preferences aren’t stable, transitive, independent of framing, etc. The question is: do these facts really need to be “addressed” by policy?"
First, I obviously reject the neoclassical definition of rationality further down in my last post. Second, we choose for children all the time. Why? Because children lack the maturity and knowledge to make big decisions on their own. Also, there are times, such as the case with tragedy of the commons senarios, in which even when consumers individually behave rationally, the consequences of the collective action based on this individual rationality can be sub-optimal for each individual, to say the least.
From a practical perspective, you can argue all you want for a libertarian government, but such a thing has hardly ever existed, and when it did, not for long. The natural state of things is for governments to exercise some control over citizens.
"Actually, these types of services are provided in other insurance markets. For example, my auto insurance agent is independent, and works with a lot of different insurers. So, she looks for which gives me the best deal. Also, some insurers (Progressive) give information about their competitors, so that they are more likely to get the contact with the customer."
This is very, very naive. First, how is your auto insurance agent paid?
With respect to progressive, they offer quotes from a handful of large competitors. They don't offer quotes for the many more numerous cheaper, smaller ones.
"On occasion, people make mistakes. The question is: can we set up a system that is actually any better?"
Sure we can. In the example about banks offering bum advice to pump up their investment banking clients' assets, we can mandate disclosure of conflicts of interest or simply make it illegal for firms to engage the public with conflicting interests.
In the case of health insurance, we can mandate coverage without exclusions, require even the young and healthy to get some form of this insurance (provides more revenue to cover costs), and subsidize those who can't afford it. Most of the US healthcare system is already subsidized anyway. Or, less extreme, you could mandate a simplified summary of benefits and exclusions and tax health insurance companies to fund independent agencies to offer advice on choosing plans.
"Which assumption do you mean precisely? As far as watching the process unfold, it’s not hard to point out the most recent housing bubble (which Austrians identified, and many economists missed). Very low interest rates post-9/11 led to investment in housing that shouldn’t have happened. When interest rates moved back up, these investments were revealed as erroneous."
What is the mechanism by which this misallocation occurs? What is the explicit model?
And where is the model and the evidence that fiat, unbacked currencies lead to bubbles? Yes, bad monetary policies can help fuel bubbles, but create them? Bubbles come naturally with markets, because almost everyone benefits from creating them. Executives get huge bonuses, stock and bondholders get capital appreciation, goods and services providers get more revenue and profits, consumers get more jobs, higher wages, and more credit, and politicians are more secure in their jobs when economies appear to be growing rapidly.
Of course, the gold standard is no solution, as politicians have always watered down or completely abandoned such schemes whenever it suited them.
"How can you identify someone’s preferences if you don’t actually observe people act? Now, it may be that you can come up with a model for their preferences – but that model can’t be tested unless you have some observable data. And you can’t get any reliable observable data on preferences unless you observe people actually making choices."
Well, you don't have to witness someone behaving making real life decisions. You can invite them to the lab, take baseline physiological data, and examine the direction and strength of there preferences for competing options, manipulating variables such as expected gains, costs, temporal discounting, response latency, marginal rates of substitution, and the apparent baseline rate of intake of reinforcement. Do this often enough and you can come up with behavioral forecasts, the precision of which is surprising. You can also determine the relative and absolute subjective values placed on any stimulus.
Published: August 7, 2009 2:55 PM
Mike S.
It's not that human behavior is stochastic, but that this is the most efficient way I know of to model learning for my purposes. The fact that "behaviour changes all the time" is irrelevant if you can model those changes, which I do. The learning functions are integrated with those of motivation.
If you have a better idea on how to model behavior for my purposes (which you're not even familiar with. hmmm) I'm all ears. Deal with generalization, discrimination, symmetry, transitivity, blocking, and sometimes vast real and apparent permutation spaces and tell me how you do it.
"This is poor scientific method .If human behaviour were stochastic, there would be no use for 'research' work. If people dont learn from research,then why do research?.Human behaviour is absolutely not stochastical -behaviour changes all the time. Human behaviour is action under uncertainty. You need to read Rizzo to understand why stochastic modeling is bogus in economics.sorry mate, you've been had by economists with physics envy."
Published: August 7, 2009 3:05 PM
Pravin
I am not aware of your reasons to model whatever you are trying to fit your equations into.
Most models in finance are built so that they can be used for prediction. Thats why people use models in risk management -to check if they will be safe given the 'behaviour' of markets.
The Austrian position is that is is futile to use mathematical models to do this. Not sure if you read Nassim Taleb's -who was a successful practitoner himeself- books/articles about the charlatans that create these models (including those who have won nobel prizes).
Astrology has a better chance than pseudo stochastics. anwyay, what is the big need to use mathematical language (forget the fact that it is futile to do so). it has got to be be physics envy.
Published: August 8, 2009 1:46 AM
Mike S.
Pravin,
Who mentioned anything about finance models? I'm not talking about Value at Risk. I'm talking about a psychological model.
Published: August 8, 2009 12:16 PM
Lucas M. Engelhardt
Merely processing information more efficiently would help.
Of course, learning to process information is costly. So, that cost needs to be balanced against any benefits.
Perhaps because there aren't incentives to offer them. For one thing, they might be much more expensive in some ways, especially if the cost of simplicity is giving up exclusions based on pre-existing conditions, or likely need for expensive treatment.
Of course, this cost must be measured against any potential benefits from higher premiums.
What you're suggesting - essentially - is that the higher cost from non-exclusion is greater than the benefit to the consumer - so that the consumer will be unwilling (or unable) to pay the higher premium that comes with such a policy. If that's the case, then it must be the case that complexity is not a problem - it is in fact the solution to the problem. People are willing to give up coverage of certain conditions (like preexisting ones) in exchange for significantly lower premiums. Naturally, some level of complexity is involved in this.
On the other hand, policies with exclusions are cheaper, but still very expensive? Why? Sure, some misguided government policies might be partially to blame. But, why would insurance companies want insurance to be cheap? Wouldn't it make sense for them to set a price that is as far above the cheapest price possible, while not exceeding the ability of too many consumers to pay? Notice that they often recruit government in these efforts, as insurance companies actually favor an Obama-style plan that doesn't have the public plan option.
This statement raises a definite point of agreement - I think. Now, it's true in every single industry that firms want to charge the highest price possible - assuming that it doesn't drive customers away. However, because of competitive pressures, customers often DO get driven away. So, the question is: why are competitive pressures so lacking in the health insurance industry? I think you're right - a lot of it has to do with regulatory capture.
First, I obviously reject the neoclassical definition of rationality further down in my last post.
In that case, please define "rational".
To me, it seems like you accept the neoclassical definition of rationality, but just believe that people aren't rational. This is something very different from rejecting the definition. Since you say you don't accept the neoclassical definition, odds are there's a gap in my understanding of what you mean by "rational".
Second, we choose for children all the time. Why? Because children lack the maturity and knowledge to make big decisions on their own.
Here's the problem: there is some general tendency for parents to act as truly benevolent dictators over their children. I don't see any such tendency in the political sphere. Instead, I can very easily interpret political actions as being simply selfish - and not, in fact, for the good of the people at all.
Also, it strikes me as somewhat elitist to declare that a rather large proportion of adults are effectively children who are incapable of making their own decisions. As was discussed in the great work of philosophy, Star Wars, Episode 2:
Anakin: "Then they should be made to agree."
Amadala: "By whom? You?"
Anakin: "No. By someone wise."
Amadala: "Sounds like a dictatorship to me."
Anakin: "If it works..."
(Some paraphrasing, as my memory isn't perfect.)
This is very, very naive. First, how is your auto insurance agent paid?
Of course I know how they are paid. They are paid by me deciding that I want a policy with them. If they do not provide a good deal, then I will switch. This provides my agent with an incentive to provide a good deal.
Also, just to be sure, I check with a competitor or two every now and then. If I find a better deal, I let my agent know - and they respond by providing an even better deal than the one I found. They now know me well enough to know that I won't let them get away with giving me an overpriced policy for very long, so they don't bother.
With respect to progressive, they offer quotes from a handful of large competitors. They don't offer quotes for the many more numerous cheaper, smaller ones.
Here you're bringing in what I'd call "functional omniscience" again. If information is not 100% complete, you declare it to be insufficient.
Sure we can. In the example about banks offering bum advice to pump up their investment banking clients' assets, we can mandate disclosure of conflicts of interest or simply make it illegal for firms to engage the public with conflicting interests.
Two words: regulatory capture. There's a tendency for the regulated to start calling the shots - which suggests that regulation is likely to become a bludgeon used by corporations against consumers. I think recent experience shows this to be true.
In the case of health insurance, we can mandate coverage without exclusions, require even the young and healthy to get some form of this insurance (provides more revenue to cover costs),
Here's a problem. You're implicitly assuming that a cost imposed by force on one person can be offset by a benefit to another. But, interpersonal comparisons of utility are generally agreed to be invalid. So, we can't do that and declare it to be "better" from an economic perspective. Add to that the morality of what is effectively institutionalized theft...
and subsidize those who can't afford it. Most of the US healthcare system is already subsidized anyway.
If you subsidize something, you get more of it. If you subsidize the ill, you will have more illness.
Or, less extreme, you could mandate a simplified summary of benefits and exclusions and tax health insurance companies to fund independent agencies to offer advice on choosing plans.
Question: is the problem that insurance is complex? or is the problem that the presentation is complex? If it's the first, then a "simplified statement" is going to be misleading. If it's the second, then the overly complex statement is effectively fraud, and I agree that it should be disallowed. Also, the tax will increase the costs of health care... so, this system only has a prayer of working if you think that health care's problem is that it's not competitive enough - and that that lack of competition is purely because of information problems. However, a quick gander at, say, UnitedHealth Group's income statement shows that they have profit margins under 10%... which suggests that the market isn't enjoying monopoly profits. (Google has profit margins of 30%.) So, the problem isn't that premiums are placed at monopoly levels. The problem is that costs of "production" are so high.
What is the mechanism by which this misallocation occurs? What is the explicit model?
It comes in through the effect of interest rates on the discounts of future payments. Since future payments have a discounted value of Payoff/(1+r)^n, the longer the period of production (n), the bigger an effect changes in interest rates (r) have on the value of the investment. So, a low interest rate encourages investment - and encourages it disproportionately in long-production-period industries. Housing is a good example. A house is a long-term investment that provides payoffs for a very long time period. The specific investment depends on the cycle. (In the late 1990s, it was Internet stocks - which were believed to become profitable when they got big enough - a process that takes considerable time.)
And where is the model and the evidence that fiat, unbacked currencies lead to bubbles? Yes, bad monetary policies can help fuel bubbles, but create them?
Bubbles - by definition - come about when the price of an asset is supported by high expectations of future prices that have nothing to do with expected "dividends" from the asset (whatever form that might take). By increasing the value - and therefore price - of specific assets, bad monetary policy leads to the expectation of rising prices for the asset. Naturally, it doesn't HAVE to. People might recognize that the rising prices won't last, and refuse to create a bubble. But, it isn't unusual for people's expectations of prices into the near future to be informed by their observations in the recent past. Thus, rising prices breed expectations of rising prices - and bubbles.
Bubbles come naturally with markets, because almost everyone benefits from creating them. Executives get huge bonuses, stock and bondholders get capital appreciation, goods and services providers get more revenue and profits, consumers get more jobs, higher wages, and more credit, and politicians are more secure in their jobs when economies appear to be growing rapidly.
This view requires a very odd view of motives for many of these groups. You seem to suggest that workers - for example - go out and buy overpriced homes during a housing bubble so that their wages will go up. This hardly seems realistic. What seems more likely is that workers see that house prices are going up (a reasonable result of low interest rates - set there by monetary policy), and want to get in on the action.
Of course, the gold standard is no solution, as politicians have always watered down or completely abandoned such schemes whenever it suited them.
This seems like a problem with politicians, not a problem with the gold standard. It's also true that politicians have hyperinflated fiat currencies whenever it suited them.
Well, you don't have to witness someone behaving making real life decisions. You can invite them to the lab, take baseline physiological data, and examine the direction and strength of there preferences for competing options, manipulating variables such as expected gains, costs, temporal discounting, response latency, marginal rates of substitution, and the apparent baseline rate of intake of reinforcement. Do this often enough and you can come up with behavioral forecasts, the precision of which is surprising.
The difficulty: there's every reason to believe that people act differently when they know they are being studied. Simple self-reflection is enough to establish that. (There's also a great episode of King of the Hill that brings that out. And, yes, I do refer to cartoons quite a bit. ;-) ) As a result, experimental results are perfectly fine for negating principles that are believed to hold universally. (A universal principle will not be violated in the lab or out of it.) However, we can't use them to establish universal principles that are expected to hold outside the lab.
Of course, it all comes down to what your purposes are. If your purpose is to come up with a precise model that isn't too inaccurate, then lab work might be fine. However, if your purpose is to get at universal laws of human action, then lab work isn't going to get you there. The best it can do is negate hypotheses (which are generally complex) and provide some very uncertain hints toward the truth.
Published: August 10, 2009 11:17 AM
Mike S.
"Of course, learning to process information is costly. So, that cost needs to be balanced against any benefits."
Complexity can be costly. I am left to wonder why surrendering better analyses of relevant costs and benefits of healthcare plans for the sake of saving limited time and resources is necesarily better than having less complexity, and perhaps less flexibility? Now, maybe private insurance consultants could help the former situation, but is that to say the latter is necessarily inferior, expecially if coupled with some subsidies for those who need them and an exclusion of pre-existing conditions and dropped coverage due to claims?
"Here you're bringing in what I'd call "functional omniscience" again. If information is not 100% complete, you declare it to be insufficient."
I'm not being absolutist. More easily derivable information might help in choosing plans. It can takes us closer to the ideal.
"Two words: regulatory capture. There's a tendency for the regulated to start calling the shots - which suggests that regulation is likely to become a bludgeon used by corporations against consumers. I think recent experience shows this to be true."
This is certainly partially true, as government seals of approval can actually lead to more confidence in crooked institutions than they might garner on their own. And I do take Friedman's perspective that what an ideal government ought to do and what real governments can do are two different things. However, some rules can be effective, at least until regulatory capture becomes significant.
"Here's a problem. You're implicitly assuming that a cost imposed by force on one person can be offset by a benefit to another. But, interpersonal comparisons of utility are generally agreed to be invalid. So, we can't do that and declare it to be "better" from an economic perspective. Add to that the morality of what is effectively institutionalized theft..."
Well, with the proper metrics the relative benefits as operationalized using utility could be employed to demonstrate a net benefit to subsidizing healthcare, in principle. As for morality, that's subjective and we know that the greatest political forces win, not what anyone consistently considers the most moral ones.
"However, a quick gander at, say, UnitedHealth Group's income statement shows that they have profit margins under 10%"
But, what have the average coporate profits been over the last 25, 10, 5 years? That's high. Google profits benefit more from innovation, which high profit margins should reasonable reward. And if, as you stated, production costs are high for private plans, Medicare's overall cost-per-beneficiary are lower.
"It comes in through the effect of interest rates on the discounts of future payments. Since future payments have a discounted value of Payoff/(1+r)^n, the longer the period of production (n), the bigger an effect changes in interest rates (r) have on the value of the investment. So, a low interest rate encourages investment - and encourages it disproportionately in long-production-period industries. Housing is a good example. A house is a long-term investment that provides payoffs for a very long time period. The specific investment depends on the cycle. (In the late 1990s, it was Internet stocks - which were believed to become profitable when they got big enough - a process that takes considerable time.)"
Just that simple formula? But, the conventional wisdom is that perceived temporary changes in short-term rates shouldn't affect long term rates much, if any. Also, does this assume that consumption goes down, because, empirically, the opposite is true. Shouldn't a lower cost of money have other distributional effects as well?
"Bubbles - by definition - come about when the price of an asset is supported by high expectations of future prices that have nothing to do with expected "dividends" from the asset (whatever form that might take). By increasing the value - and therefore price - of specific assets, bad monetary policy leads to the expectation of rising prices for the asset. Naturally, it doesn't HAVE to. People might recognize that the rising prices won't last, and refuse to create a bubble. But, it isn't unusual for people's expectations of prices into the near future to be informed by their observations in the recent past. Thus, rising prices breed expectations of rising prices - and bubbles."
That's incomplete.
"This view requires a very odd view of motives for many of these groups. You seem to suggest that workers - for example - go out and buy overpriced homes during a housing bubble so that their wages will go up. This hardly seems realistic. What seems more likely is that workers see that house prices are going up (a reasonable result of low interest rates - set there by monetary policy), and want to get in on the action."
No, workers are more likely to buy houses if their wages increase and are expected to remain higher and interest rates low. They seek capital appreciation, obviously, among other things. And where's the evidence that fiat currencies necessarily create bubbles? What about the crazy Wildcat Banking era in the US? There was no central bank back then and banks could issue their own currencies.
"This seems like a problem with politicians, not a problem with the gold standard. It's also true that politicians have hyperinflated fiat currencies whenever it suited them."
Is there a country with a gold standard today? It's fine to be idealistic, but to press on this issue for decades when every country in the world has abandoned gold... It's just not practical. Fiat paper currency will work fine, so long as politicians are disciplined. Same argument as for gold. They aren't disciplined enough to honor it.
Besides, the gold standard led to too many interest rate fluctuations when we had it.
"The difficulty: there's every reason to believe that people act differently when they know they are being studied. Simple self-reflection is enough to establish that."
Well, science isn't based on simple reflection and so long as there are no significant consequences for being observed (such as on the job), subjects habituate to the observer. This is basic psychology.
Published: August 10, 2009 9:19 PM
readingatwork
Point 1: Insurance comapnies could come up with scheems to avoid the moral hazard problem, ie giving a lump sum of money for a given diagnosis. = Good point.
Point 2: Insurance companies in a market would offer coverage to the risky, it would just be more expensive, which is not a bad thing. = You are missing a big point; insurance companies spend a lot of money researching who is risky. These are resources wasted.
Point 3: "It is not the least bit uncommon for people to seek a second opinion, or, when one procedure has failed to prove effective, to try another - often from a different doctor with different ideas." = Oh come on. Right, that neurosurgery failed to prove effective, now ill try having a spinal surgeon fuse my vertebrae. Give me a break, who is really being dumb or dishonest here? Not Krugman.
Published: September 16, 2009 1:23 AM
Lucas M. Engelhardt
Point 2: Why are these resources "wasted"? Typically, when decisions are made with bad information that's considered a "market failure" by many economists. Now, you're saying that trying to get information is a "waste" of resources? By what standard?
Now, suppose that we live in a world where insurance companies can't figure out who is risky and who isn't. (Maybe it's technically impossible, maybe it's illegal.) In that case, they'll have to price insurance based on their uninformed guess of how risky the average patient is. The result: a healthy patient faces a premium that is actuarially "too high", while a sick patient faces a premium that is actuarially "too low". So, many of the healthy will choose not to have health insurance, as it's cheaper to live without it. Insurance companies will take into account the fact that the healthy have left the insurance pool, and raise premiums... Now, premiums are too high for the "moderately sick", and they drop out - and so on. This is the standard "adverse selection" story.
So, all the money being wasted to determine people's risk levels is actually being spent to ensure that there is a market for each risk level. Otherwise, only the very sick will be insured - and they're going to pay very high premiums to be so. (In fact, from what I've read, many people are uninsured not because they are denied coverage, but because they think coverage is too expensive.)
Point 3: Being someone who has a handful of family members that have had serious medical conditions, I know that they often DID get second opinions. In fact, I don't think any of them just gave up if what their first doctor tried didn't work. Of course, this sample is far from random, but I'm curious if you have any evidence to the contrary.
Published: September 16, 2009 6:53 AM
readingatwork
Thanks for your response.
Point 2:
I see what you're saying. I would say there are 2 categories of health risk; those that a patient can control, and those the patient cant. Researching the first is perhaps useful, in that patients can then face the proper incentives to live healthily.
I dont see a point in researching the second. Government intervention could solve this market failure by requiring everyone to have insurance, and that insurance comapnies offer coverage to everyone, regardless of prior health conditions, and without basing their price on the person's health. Then everyone has insurance and no one is spending money gathering information on people's health risks. The only "downside" I see is that people with good genes are paying a bit more to help people with bad genes.
Point 3: I dont doubt people get second opinions, and that they can help. But that doesnt make medicine the same as buying bread. I dont have evidence, but common sense says that its a lot more difficult to figure out which doctor is giving you a correct diagnosis -the process of acquiring the knowledge and necessary information to make a diagnose is expensive- then which baker is selling you stale bread. And figuring out which doctor is performing poor procedures could be impossible or costs someone's life.
Published: September 16, 2009 6:12 PM
Lucas M. Engelhardt
Point 2: Actually, the problem I describe will happen as long as the patient has better information about their health than the health insurance company does - even if it's outside their control. For example, the fact that my mom has had skin cancer makes it somewhat more likely that I will get skin cancer. I know this. If my insurance company isn't allowed to gather information about my family medical history (which is common any time someone applies for insurance), then I'm more likely to sign up for health insurance than someone who doesn't have skin cancer in their family - resulting in the same problem that I describe. People who are high risks - even if it is outside their control - will buy health insurance, people who are low risks won't.
Of course, we can "solve" this problem by forcing everyone to buy health insurance. The question is: do you really believe that making the healthy pay for the sick is something that should be done at the point of a gun? I have no problem with people voluntarily giving money to help the sick, but it's quite different to make them do it or face fines/jail/etc.
Other than that normative aspect, there's also the fact that, if everyone is forced to carry insurance, then we can expect overuse of health care, and very high premiums as a result - even if we can cut out some of the administrative costs from not gathering health information.
Point 3: Now, it's true that I often can't tell which doctor is giving me the right diagnosis - but I often can tell whether a prescribed treatment is working. For example, if my dermatologist gives me a medicine that's supposed to get rid of a wart, and the wart doesn't go away, I know that it didn't work. If they give me a medicine for high blood pressure, and my blood pressure comes down to normal, then I know it worked. Obviously, things are harder with, say, cancer. But, seeing as patients actually want to know whether or not a treatment is working, one would expect that they'd be willing to pay for good information about whether treatments are working, and that the market would develop a system to provide good information.
What isn't clear to me: how a system that isn't market-based will be any better along these lines. The UK's NHS - which is about as "government-run health care" as they come - has instructions for getting second opinions, because it is true that medicine is complicated and that doctors occasionally make mistakes. I don't see how this creates a problem for a market-based system but not also for other systems.
Published: September 16, 2009 9:52 PM
readingatwork
As for overuse of health care if everyone was required to carry government insurance, isnt that essentially the same moral hazard problem Krugman/Arrow bring up and you suggested could be solved by paying a lump sum for a given diagnosis, rather then providing treatment?
In general, you raise interesting questions. I would just say that it seems the argument has moved from whether a free market in health care would be pareto optimal to whether it would at least be preferable to a market with some sort of government intervention.
I think there are at least some, and possibly a lot, of interventions that would improve on the efficiency of a free market. For example, you admit that it can be difficult for a consumer to judge potential cancer treatments, but assert that, if a free market was allowed to form, it would likely provide the necessary information to consumers, for a price. But isnt research a classic positive externality that will be under-produced if left to the market? So I think, at the very least, government should use taxes to pay for public information about the efficacy of different treatments and procedures.
There are other pitfalls of a free market once information problems are introduced. Consider 2 types of people, those who want to learn medicine to be liscensed and make money by tricking patients into unecessary care, and those who want to help patients. A free market could price the cost of a medical education high enough so that the altruistic types would not be able to afford it. Perhaps in England, where both the cost and financial rewards of a medical education are lower, those who end up becoming doctors are more altruistic then in their counterparts in the U.S., making it less necessary for English patients to spend resources informing themselves.
Published: September 17, 2009 6:29 PM