Saturday, March 24, 2012

Why Markets Are Miraculous

I'm browsing through a new hardback called "Why Good People Are Divided By Politics And Religion", by Jonathan Haidt.  Haidt is a psychology professor at the University of Virginia.  He also teaches Business Ethics at New York University. 

This is good stuff.  Here's a snippet called "Markets Are Miraculous", where he looks at the Libertarian mindset on a few issues:

"In 2007, David Goldhill's father was killed by an infection he caught while in the hospital.  In trying to make sense of this unnecessary death, Goldhill began to read about the American health care system, which kills about 100,000 people annually buy such accidental infections.  He learned that the death rate can be cut by two-thirds when hospitals follow a simple checklist of sanitary procedures, but most hospitals don't adopt the checklist. 

Goldhill, a businessman (and Democrat), wondered how it was possible for any organization to pass up a simple measure that yielded such massive payoffs.  In the business world, such inefficiency would soon lead to bankruptcy.  As he learned more and more about the healthcare system, he discovered just how bad things get when goods and services are provided without a properly functioning market. 

In 2009, Goldhill published a provocative essay in The Atlantic Monthly titled "How American Health Care Killed My Father".  One of his main points was the absurdity of using insurance to pay for routine purchases.  Normally we buy insurance to cover the risk of a catastrophic loss.  We enter an insurance pool with other people to spread the risk around, and we hope never to collect a penny.  We handle routine expenses ourselves, seeking out the highest quality for the lowest price.  We would never file a claim on our car insurance to pay for an oil change. 

The next time you go to the supermarket, look closely at a can of peas.  Think about all the work that went into it - the farmers, truckers, and supermarket employees, the miners and metalworkers who made the can - and think how miraculous it is that you can buy this can for under a dollar.  At every step of the way, competition among suppliers rewarded those whose innovations shaved a penny off the cost of getting that can to you.  If God is commonly thought to have created the world and then arranged it for our benefit, then the free market (and its invisible hand) is a pretty good candidate for being a god.  You can begin to understand why libertarians sometimes have a quasi-religious faith in free markets. 

Now let's do the devil's work and spread chaos throughout the marketplace.  Suppose that one day all prices are removed from all products in the supermarket.  All labels too, beyond a simple description of the contents, so you can't compare products from different companies.  You just take whatever you want, as much as you want, and you bring it up to the register.  The checkout clerk scans in your food insurance card and helps you fill out your itemized claim.  You pay a flat fee of $10.00 and go home with your groceries.  A month later you get a bill informing you that your food insurance company will pay the supermarket for most of the remaining cost, but you'll have to send in a check for an additional $15.00.  It might sound like a bargain to get a cartload of food for $25.00, but you're really paying your grocery bill every month when you fork over $2,000.00 for your food insurance premium. 

Under such a system, there is little incentive for anyone to find innovative ways to reduce the cost of food or increase its quality.  The supermarkets get paid by the insurers, and the insurers get their premiums from you.  The cost of food insurance begins to rise as supermarkets stock only the foods that net them the highest insurance payments, not the foods that deliver value to you. 

As the cost of food insurance rises, many people can no longer afford it.  Liberals (motivated by Care - you'll have to read the entire book to get that part - TWS) push for a new government program to buy food insurance for the poor and the elderly.  But once the government becomes the major purchaser of food, then success in the supermarket and food insurance industries depends primarily on maximizing yield from government payouts.  Before you know it, that can of peas costs the government $30.00, and all of us are paying 25 percent of our paychecks in taxes just to cover the cost of buying groceries for each other at hugely inflated costs. 

That, says Goldhill, is what we've done to ourselves.  as long as consumers are spared from taking price into account - that is, as long as someone else is always paying for your choices - things will get worse. 

In the U.S., 84% of our healthcare checks are written by someone else - Uncle Sam or an insurance company - TWS

We can't fix the problem by convening panels of experts to set the maximum allowable price for a can of peas.  Only a working market can bring supply, demand, and ingenuity together to provide health care at the lowest possible price.  For example, there is an open market for LASIK surgery (a kind of laser eye surgery that removes the need to wear contact lenses).  Doctors compete with one another to attract customers, and because the procedure is rarely covered by insurance, patients take price into account. 

Have you ever heard a radio ad about a doctor who will fix a broken arm better and cheaper than anyone else?  I haven't.  How about LASIK surgeons?  They advertise as much as McDonald's.  - TWS. 

Competition and innovation have driven down the price of the surgery by nearly 80 percent since it was first introduced.  (Other developed nations have had more success controlling costs, but they too face rapidly rising costs that may become fiscally ruinous.  Like America, they often lack the political will to raise taxes or cut services.) 

When libertarians talk about the miracle of "spontaneous order" that emerges when people are allowed to make their own choices (and take on the costs and benefits of those choices), the rest of us should listen.  Care and compassion sometimes motivate liberals to interfere in the working of markets, but the results can be extraordinary harm on a vast scale.  (Of course, as I said above, governments often need to intervene to correct market distortions, thereby making markets work properly. - I believe he's talking about externalities, etc. - TWS)    Liberals want to use government for so many purposes, but health care expenses are crowding out all other possibilities.  If you think your local, state, and federal governments are broke now, just wait until the baby boom generation is fully retired. 

I find it ironic that liberals generally embrace Darwin and reject "intelligent design" as the explanation for design and adaptation  in the natural world, but they don't embrace Adam Smith as the explanation for design and adaptation in the economic world.  They sometimes prefer the "intelligent design" of socialist economics, which often ends in a disaster from a utilitarian point of view. 

I can't wait to read the rest of this book. Greatness. 


Jeff Hogan said...

I like where this guy goes... It seems he's a bit more moderate than most: He acknowledges that some government intervention is necessary to ensure that markets work correctly, and he's right.

Deregulation of insurance isn't the answer, a complete overhaul of how business is done is a necessity. So long as insurance and pharmaceuticals have a stranglehold on the legislative process, nothing will ever change. Term limits for ALL elected representatives, and let's really put the noose around the lobbyist's neck. That's my solution to all political problems.

The Whited Sepulchre said...

I think there should only be one insurance regulation, and that is this: "Did they do what they said they were going to do?"
That would solve most of our problems.

Pharmaceuticals need less regs, not more. It costs 1 billion for them to jump through all the hoops to bring a new product to market. I would like a choice between "regulated" and "unregulated" pharmaceuticals. Everyone else could be given the same choice. Guess which one the general public would eventually go with?