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Nationalized Health Care and Economic Fallacy

Sheldon Richman
Campaign For Liberty
March 2, 2010

It takes a discussion of the role of government in health care to really bring out the economic illiteracy among the politicians and commentariat. The long list of fallacies they have uttered about markets and government is truly stunning.

Take competition. President Obama, after several unsuccessful attempts at selling his plan to redesign 15 percent of the U.S. economy, turned to a “competition and choice” pitch. All he sought to do, he said, was to make the health-insurance market more competitive. He actually wanted to set up markets, called “exchanges.” One of the competitors he envisioned was a government insurance plan, known as the public option. (He waffled about this as the political winds blew back and forth.)

Who could have been against this? Competition and choice are good. But something was fishy. Government is the opposite of competition and choice. Government doesn’t give us the choice to opt out of Social Security or Medicare. You’re taxed whether you like it or not. That compulsion constricts the choice in nongovernment alternatives.

We might also ask what has kept the insurance industry from being competitive. Could government have anything to do with this? For example, could the elaborate insurance regulations and privileges at the state level be at fault? Could the federal prohibition on the interstate sale of insurance plans bear some of the blame?

If government is the reason we have little insurance competition, it seems strange to look to it to create competitive markets. All it would need to do is get out of the way!

The idea that government must set up exchanges to make it easy for people to shop for insurance plans is a bit absurd. There’s a booming market for life insurance (and nearly everything else) on the Internet. Maybe word of Net commerce has not yet come to the attention of the president and the health-”reform” community. They really should keep up with the news.

But let’s leave all those points aside for now and give Obama the benefit of the doubt. He said he wanted to create competition and choice, and proposed “reforms” to make that happen. How well did he do?

If this was an Econ 101 project, he’d have earned an F.

Obama’s scheme would not create competition and choice but rather a monopolistic cartel and coerced conformity. Orwell has a new slogan for his totalitarian government in 1984: Monopoly is competition; compulsion is choice.


What is competition? Let’s start with what it is not. As Ludwig von Mises and F.A. Hayek elaborated, competition is valuable not primarily as a contest among producers of known goods and services using known methods of production and business practices. Rather, to use Hayek’s phrase, competition is a discovery procedure. (I believe “process” would have been the better word.) What it does is teach us things we didn’t know before the competition took place and might not learn otherwise. What kind of things? Things such as: which hitherto unknown products best serve consumers’ interests as they see them, at what price, and through which low-cost methods. Such things can’t be known in advance; computers can’t give us the answers after data entry. The relevant “data” do not exist as such! The information is decentralized and much of it, such as nuanced consumer preferences, is rarely articulated. Rather, it is revealed — nay, created — as producers and consumers go about their business, improvising on the spot and facing unanticipated alternatives in their efforts to improve their conditions. The information certainly is not available to a bureaucracy or panel of experts.

Nobel Prize-winning economist James Buchanan has discussed that last point:

Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of “as if” functions that are maximized. But these “as if” functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be….

To put it briefly, consumers, as much as producers, are entrepreneurs.

The value of this discovery process should be clear for any good or service, but how much more so for medical services, where the potential for variation in individual needs and preferences is virtually infinite!

The public option

One hardly needs to say that Obama’s plan showed no appreciation for competition as a discovery process. He and his experts claimed already to know what insurance products should be offered and what business practices should be used. The leading bills permitted no variation — that is, no competition. The free market’s entrepreneurial trial and error, in which firms offer competitive products and consumers render verdicts, would be outlawed.

To see this, all one needed to do was read the bills. (I realize that was no easy task. The authors, I believe, made them as hard to decipher as possible; of course members of Congress do not read them.) There one would have seen virtually every detail of the “qualified” health-insurance plans we were mandated to buy — from what services must be covered (including physical exams and “mental health” services) to how prices were to be structured (no “discrimination” against the already sick). Details not specified in the legislation were left to the secretary of Health and Human Services or other officials and commissions. The powers left undefined were more threatening than those that were defined.

Now a simple question: Is being forced to “choose” among an “array” of virtually identical health plans offered by fully regulated companies really worthy of being called competition and choice?

Instead of competition the bill would have created a newer, bigger insurance cartel, directed from Washington. Calling Obama’s exchange a “competitive market” is like calling a graveyard a “bazaar.”

Given this comprehensive regulation — which the insurance companies embraced in return for a guarantee of customers — it really didn’t matter whether the government offered its own plan through a so-called public option. What is revealing about the public option, however, is the attitude public officials have toward profit. Obama emphasized that the public option would not be motivated by profit, showing further his ignorance of the nature of competition. In fact profit doesn’t merely reward past business success. As the essential element of the competitive discovery process, profit signals to entrepreneurs where consumers want scarce resources invested in the future; losses do the opposite.

How would the public option know whether it was being responsive to consumers? That’s actually a silly question. It wouldn’t exist to serve consumers but to dictate to them. Like Fanny Mae, the public option would have an implicit government guarantee along with the ability to set prices. When it under-reimbursed doctors and hospitals, they would shift the costs, as they do now under Medicare, to private policyholders, making private plans more expensive than the public option. As “uncompetitive” private companies left the market, only the public option would remain. Single-payer “insurance” would be here. If it seriously tried to reduce medical costs and avoid bankrupting the government, the result would be shortages, queues, and rationing.


Now that the R-word has come up, let’s close on that issue. It is beyond dispute that the government cannot expand health-care coverage and reduce overall health-care costs without rationing, however subtle and indirect. I believe the proponents of nationalization know this. They indicate such knowledge every time they say, as economics professor Uwe Reinhardt, did, “[Free] markets are not an alternative to rationing. They are just one particular form of rationing.”

But that is wrong. Markets do not ration. Unfortunately, even pro-market economists talk this way. Not only is it untrue; it also damages the effort to prevent nationalization of health care and insurance.

Markets do not ration because markets don’t do anything. As Ludwig von Mises wrote in Human Action,

The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor…. The market process is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society.

At best, talk about market rationing is metaphorical. Since, in competitive markets, scarce resources and labor are directed to those uses consumers consider most important, it is as if the market uses the price system to allocate and ration. But this is strictly metaphorical, and as Thomas Szasz reminds us, we literalize metaphors at our peril. The market does not literally direct resources. People do, through buying and selling. The market is what emerges spontaneously — unplanned — from that continuing series of transactions.

Rationing implies a conscious plan, a purpose, a common pot, a decision-maker. But there are no such things with respect to the market as a whole. We cannot even say, literally, that the market’s purpose is to permit the efficient allocation of resources. The market has no purpose. As another Nobel Prize-winning economist, F.A. Hayek, put it in “Competition as a Discovery Procedure,”

[Like] any spontaneously formed order, it [the market] cannot legitimately be said to have particular ends….
[The] existence of a spontaneous order not made for a particular purpose cannot be properly said to have a purpose….

Well then, do insurance companies ration health care, as people often say? Again, no. We wouldn’t say the grocer rations apples because he hands over particular quantities to particular consumers or that consumers ration their money to the grocer. Rather, we say the grocer engages in exchanges with each of the consumers, who buy the quantity they wish, subject to their income constraints.

Likewise, we should not say that insurance companies ration health care by the coverage decisions they make. The standards for those decisions are spelled out in insurance contracts and are associated with the premiums charged. The problem is not that insurance companies ration, but rather that in most cases, thanks to interventionist tax laws, employers buy insurance for their employees and the coverage therefore appears free or at least cheap. If people are to have control over their own health care and insurance, government must stop favoring employer-based insurance over individually purchased insurance. That would require wholesale deregulation, which would indeed be the only true reform of the current government-infested system.

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