A Misunderstanding of Economics and Human Nature

Plainly, too many have never read Adam Smith, whose Wealth of Nations showed that allowing individual self interest—personal greed—to operate in unfettered in a free market was the fastest, most efficient way to broad prosperity for the entire population of economic actors. Apparently we don’t teach basic economics in school, anymore.

In a Wall Street Journal op-ed about the failure of Vermont’s overt move toward a single-payer health system, the paper noted that Harvard’s William Hsiao and MIT’s Jonathan Gruber, architects of that state’s plan, had assured all concerned of the following:

The promise of single payer is that governments can save money by eliminating the profit motive and administrative costs.

But that could be true (but not certainly so) only if there were only one player in the market.

It’s that profit motive, after all—that individual self interest—that saves money. It’s that profit motive—that personal greed—that drives down costs.

The economically illiterate—not just Hsiao and Gruber—miss (or, a cynic might suggest that a Liberal ignores, for political gain) the competition factor: the fact that there is more than one player in the market, and every one of them—competing suppliers and competing buyers—want profit.

Suppliers (of health insurance and health provision services, for instance) compete for the buyers’ dollars, so they work hard to drive down costs so they can lower their prices farther than can their competitors. Buyers want those cheap services so they compete with each other to pay as little as possible for them, but to pay a skosh more than their competing buyers so that they succeed in closing the purchase.

The result is what those in the trade call a market clearing price: the price at which all the service sellers sell their product, with nothing left over and no seller left out, and all the buyers get what they want, with no buyer left out. That price is fair, too, because no one was forced to sell or buy at a price they didn’t want or couldn’t afford.

It’s also the lowest price, with the lowest “administrative costs” (there is a non-zero floor to those costs because the workers doing the actual production get to be paid, and the producers of the services being bought for assembly into that final service get to be paid), available in order for the service to be saleable—available to interested buyers—at all.

And it’s a more accurately set price than even well-intentioned government politicians can achieve through mandate.

3 thoughts on “A Misunderstanding of Economics and Human Nature

  1. People always ask why Canada gets away with single payer.

    There’s another aspect to this, too: the US is right next door. If there’s a treatment or a drug or… that a Canadian wants that isn’t available to him on a schedule that meets his needs, or his simple desire, he leaves the single payer system and comes to the US.

    When Steve McQueen was dying of cancer, as a last resort he went to next door Mexico to try laetrile, since that was barred in the US. McQ knew it was unlikely to succeed, and he did it as a last resort, but it was his choice, not government’s.

    That’s a…convenience…that’s not available to the citizens of Great Britain, et al.

    What will be the state of medicine, of any industry, when it’s all government run? Single-payer oil development, for instance, an example of which we can see with the drilling permit, and drilling rates, on US Federal land vs US private property.

    Eric Hines

  2. And, of course, there’s no motivation for innovation. The government will also inevitably have to allocate what, if any, money is spent on research and development for a better MRI, a new cancer drug or a better hip implant. Government will probably try to fund those things, but won’t be able to accurate pick out winners and losers just by reading grant proposals. An investor with $20 million to invest would rationally invest $1 million in each of 20 firms seeking to develop a device or treatment even if the chance of success of any one of them is, say, only 10% if the investor will recoup say $30 million on any single winner. The chances of all 20 of them failing are vanishingly small and on average 2 of the 20 would come up winners. However, if government allows you to sell what you’ve discovered for just over the variable price of production the investor won’t bother. Governments being what they are will try to pick out the winner in advance. Moreover, the firms in which the government might invest will dry up. People always ask why Canada gets away with single payer. Leaving to one side whether the Canadian system delivers better outcomes, it is the classic free rider. It also starts ignoring patents on drugs before they have expired and allows generic versions to be sold before they can be in the US. While this is a great deal for Canadians, it only works because the US is roughly 10 times the size of Canada. If the US did the same thing, private R and D in new drugs will vanish.

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