We have already discussed the two benefits of markets – efficiency and liberty. Win/win trades increase output, in terms of net happiness as measured at the level of the individual, by using the same inputs. And they allow us to decide freely with whom we will trade and for what.
And we have talked about two of the three fundamental flaws of markets. They overweight the individual over the group. No matter how much we want to protect the sick, markets have no mechanism for responding to that group-level desire; they only respond to individualistic interests. And markets overweight the prevailing distribution of resources, meaning that who will trade with whom is a function of what we each have to begin with . If you are stuck with the lead hat, no one will trade with you. There is no mechanism within a market to allow the poor to trade their way to wealth.
Now we look at the third fundamental flaw of all markets.
Favoring the instrumental over the intrinsic
If you were my friend, and you had a car and I didn’t, would you drive me to the airport? I think you probably would, if you had the time.
And when we got to the airport, and I pulled out $40 to pay for your time, what would be your response? If you were a struggling graduate student, you might say something like “Naw, just give me a couple of bucks for gas.” But would you take the money I was offering to compensate you for your time and effort?
Some of you might, but my guess is that the vast majority of people would not take the money. In fact, if I insisted, I would predict that most of you would feel somewhat insulted by the offer. “I didn’t drive you to the airport to make money. I did it because I was your friend, and you needed my help.” The motive for your efforts was the intrinsic value of friendship, not the instrumental value of making money. And, when I offered you the money, you felt badly by the reduction of that friendship into some kind of payback.
If you are an economist, you are probably thinking right now “Well, I would take you to the airport in exchange for the possibility that you might take me some place in the future.” Seeing everything as a matter of an exchange is one of the downsides of spending too much time studying markets, where everything is a trade.
Is that why you drove me, in order to have an option on my future energy to call upon? If so, then you would only pick friends with sufficient resources to make the friendship “worthwhile.” Is that how you pick your friends? I think not.
I remember sitting in a room filled with economists who were listening to a presentation by a budding economist who had discovered that women whose first child was a boy had gained 15 pounds more weight by the time they were forty than women whose first child was a girl. The question on the table was “Why is this the case?” The answer that most of the people in the room liked was that a women with a boy child had a stronger bargaining position vis-a-vis her husband, and so could “afford” to gain a bit more weight without threatening her position.
Really? I said. Is that how you all see marriage? When I questioned this theory, I was told by the roomful of economists that there is plenty of scientific evidence that marriage is just such a bargaining process.
While I believe strongly in the give and take that is marriage and while there is no doubt a lot of financial aspects of being married, I am not fond of thinking of it like a marketplace bargain. Isn’t something lost in the conversion of the intrinsic value of a marriage into the instrumental value of a financial bargain?
Yes. So, I believe that you answered my need because you are my friend, and you acted out of friendship, not because it was a good investment strategy.
What if you were a taxi driver?
OK, now imagine that you are a taxi driver, and you drive me to the airport. When we get there, I take your hand warmly and give you a big smile. “That was a great time,” I say, “let’s do this again soon. Maybe with the families next time?”
Sorry, but you want your $40. Not because you didn’t have a good time, and not because you don’t think I am a fine person, but because your motive was the instrumental value of “making a living.” You didn’t drive me to the airport because I was your friend, but because I was your customer in an exchange relationship.
And the point is that “Motive counts!” There is nothing wrong with being a taxi driver, but it is different from being a friend.
The motive behind Medicare
This is what we miss when we thoughtlessly decide to “privatize” programs that were otherwise motivated by concern for “the other.” In the middle part of the 20th Century, a large number of poor people in the US were the aged, struggling to meet their increased healthcare needs, and ruining their financial condition in the process. We passed Medicare in 1965 in part because we cared about these people and wanted to provide them a way to avoid poverty caused by medical need.
How cynical do you want to be? Because you can see the passage of Medicare as a step toward more governmental control over the economy, as a means of spending tax money to support hospitals and doctors, as a hand-out to the elderly by politicians who know that the elderly vote in disproportionate numbers, as a way for “forty-somethings” to avoid having to pay for Mom and Dad’s medical bills. In other words, you can interpret this action as an instrumentality; we passed Medicare for the elderly so that the rest of us could realize some gain.
But you can also see it as a caring effort by the community, through its agent, the government, to lift our parents out of poverty. And, at that level, Medicare has been a stunning success, as the elderly are no longer a large portion of the poor. And we ought to feel Good about that, the creation of our intrinsic commitment to that population.
The third fundamental flaw
So, when we privatize Medicare, as the right wing are proposing, we are taking that intrinsic value and turning it into an instrumental exchange relationship.
That’s the third fundamental flaw of all markets. Because the basis of all markets is “voluntary exchange,” they have no mechanism for valuing things for themselves (“intrinsic”) but only for what they can get you in exchange (“instrumental”).
Yet, motive counts.
Do you want to get your healthcare from a person or a hospital that you believe is motivated largely by the desire to care for you? Or would you get the same or better care from a doctor who was a shrewd bargainer and saw you as a means to make more money?
I propose that there is a difference between “Making money in order to care for people” and “Taking care of people in order to make money.” Sure, the caring doctor or hospital has to worry about the bottom line, but the making of money is the means to the end of caring. While the for profit hospital is using the provision of healthcare as a means to the end of profit.
Motive counts. And if markets only respond to the instrumental, then they are probably a poor choice for allocating healthcare motivated by the intrinsic desire to be a more caring society.
Getting closer
OK, we are getting closer to being able to apply all of this to a proposal to convert Medicare from a universal, single payer system for our elderly into a market-like transaction through issuing vouchers for the purchase of private insurance.
But first we need to spend some time talking about bicycles. Because markets only work if there is “consumer sovereignty,” and, in the next part blog posting, we will look at a market for bicycles in order to illustrate that point.
Wednesday, December 30, 2015
Monday, December 21, 2015
Vouching for healthcare, Part 2
Medicare vouchers?
Should we give people 65 and over a voucher to buy health insurance, rather than pay for their care through Medicare? Take note, because this is what some conservatives are going to propose as a market-like alternative to traditional Medicare. To see why this is a bad idea, you really need to dig down a bit into how markets work and how, sometimes, they don’t work. I started this in Part 1; given how long ago it was that I posted that essay, you may want to go back and reread it.
What we saw in Part 1 is that after two people trade in our “hat marketplace,” they are both happier, and that means that the total amount of happiness within the market goes up. After two trades, our total happiness, as measured by Δ∑IUj (“the change in the sum of all individual utility, from the first person to the last person”) went up from 9 to 25.
How markets work
This is how markets are expected to work. Voluntary exchange leads to win/win trades, which means that both parties to the trade end up happier, and so the net happiness of all of us in the market is improved.
At Time 1, total utility went up, but we still had the same 9 hats. At Time 2, after the second trade, total utility went up again, but again we got the increase in utility from the same 9 hats.
If a particular process increases the amount of output (additive happiness) while maintaining a level amount of input (9 hats), we call the result “efficiency.” We are getting more production from the same amount of input. Here is how that looks:
T0: 9 units of happiness
9 hats
T1: 16 units of happiness
9 hats
T2: 25 units of happiness
9 hats
Each trade leads to more individual happiness, but the happiness still comes from the same number of hats.
This is why, when markets work well, they promote efficiency. Win/win trades do this automatically. And markets promote liberty, because they run on voluntary exchange. If the main things you want from your allocation system are liberty and efficiency, markets are an excellent choice.
How do we help Ed?
But Ed is dying from his head condition, without a hat to protect him. All of us in the market place see his plight, and most of us feel badly for him. Ed notices that your hat is made of hard plastic, and would give him just the protection he needs. He approaches you to trade, but you value your hat fairly highly (+7) and don’t like his hat at all. You see his problem, but you didn’t cause it and don’t see any obligation to help him by giving up your hat for him.
All of us in the marketplace see this dynamic and, if asked, would urge you to trade, for Ed’s safety. A few of us approach you and suggest that you trade. You decline. More and more of us implore you to act, but you say “let Ed solve his own problems, or look to charity from someone else.”
Apparently, you are a Republican.
(I have been telling that joke for more than 30 years. At the beginning, it got laughs. By the late 80's, after years of the Reagan presidency, a growing number of students were vaguely offended, and the laughter of some was a bit embarrassed. More recently, I run into much less knee-jerk sympathy for Republicans. Probably a change for the Good.)
There is no "us"
Why don’t all of us in the market get together and make you trade? Well, that doesn’t happen in a market. In fact, it can’t happen. There is no concerted group action within markets and there is no political power to “make” any one do anything. The best markets deliver efficiency and liberty by being “free.” No coercion.
And no “us.” Note that the expression we have been using to sum up utility in our market only asks people, as individuals, to judge their individual circumstance. There is no “we” in Δ∑IUj.
Markets overweight the individual over the group
So, we have now run into the first “fundamental flaw” of all markets. Every market overweights individual values over the priorities of the group. Since markets are based entirely on individual win/win trades, there is no medium for expressing what the community might want. We may be saddened, as a group, for your refusal to come to Ed’s assistance, but there is no mechanism within a market for us to do anything about it.
And what about Tracy, who was stuck with the solid lead hat? She would love to trade, but no one will trade with her. How will she remedy her situation?
Well, she won’t. She has no way to trade herself upwards because she has no goods to trade. You can’t pull yourself up by your bootstraps if you don’t own boots.
Markets overweight the prevailing distribution of resources
Here is the second “fundamental flaw” of all markets – they inevitably overweight the prevailing distribution of resources. In other words, at any given moment, who has what within the market will, to a large extent, determine the trades that will take place. If you start with nothing to trade, the market will by-pass you entirely.
The rich will, therefore, stay rich and the poor will, perforce, stay poor.
So, we see that the sick and the poor (Ed and Tracy) have no way to use the market to address their needs, due to these fundamental flaws of the market.
In Part 3, we look at the third fundamental flaw of any market, that markets “overweight the instrumental over the intrinsic.” It all has to do with the difference between being my friend and being my taxi driver. But more on that in the next posting.
Should we give people 65 and over a voucher to buy health insurance, rather than pay for their care through Medicare? Take note, because this is what some conservatives are going to propose as a market-like alternative to traditional Medicare. To see why this is a bad idea, you really need to dig down a bit into how markets work and how, sometimes, they don’t work. I started this in Part 1; given how long ago it was that I posted that essay, you may want to go back and reread it.
What we saw in Part 1 is that after two people trade in our “hat marketplace,” they are both happier, and that means that the total amount of happiness within the market goes up. After two trades, our total happiness, as measured by Δ∑IUj (“the change in the sum of all individual utility, from the first person to the last person”) went up from 9 to 25.
How markets work
This is how markets are expected to work. Voluntary exchange leads to win/win trades, which means that both parties to the trade end up happier, and so the net happiness of all of us in the market is improved.
At Time 1, total utility went up, but we still had the same 9 hats. At Time 2, after the second trade, total utility went up again, but again we got the increase in utility from the same 9 hats.
If a particular process increases the amount of output (additive happiness) while maintaining a level amount of input (9 hats), we call the result “efficiency.” We are getting more production from the same amount of input. Here is how that looks:
T0: 9 units of happiness
9 hats
T1: 16 units of happiness
9 hats
T2: 25 units of happiness
9 hats
Each trade leads to more individual happiness, but the happiness still comes from the same number of hats.
This is why, when markets work well, they promote efficiency. Win/win trades do this automatically. And markets promote liberty, because they run on voluntary exchange. If the main things you want from your allocation system are liberty and efficiency, markets are an excellent choice.
How do we help Ed?
But Ed is dying from his head condition, without a hat to protect him. All of us in the market place see his plight, and most of us feel badly for him. Ed notices that your hat is made of hard plastic, and would give him just the protection he needs. He approaches you to trade, but you value your hat fairly highly (+7) and don’t like his hat at all. You see his problem, but you didn’t cause it and don’t see any obligation to help him by giving up your hat for him.
All of us in the marketplace see this dynamic and, if asked, would urge you to trade, for Ed’s safety. A few of us approach you and suggest that you trade. You decline. More and more of us implore you to act, but you say “let Ed solve his own problems, or look to charity from someone else.”
Apparently, you are a Republican.
(I have been telling that joke for more than 30 years. At the beginning, it got laughs. By the late 80's, after years of the Reagan presidency, a growing number of students were vaguely offended, and the laughter of some was a bit embarrassed. More recently, I run into much less knee-jerk sympathy for Republicans. Probably a change for the Good.)
There is no "us"
Why don’t all of us in the market get together and make you trade? Well, that doesn’t happen in a market. In fact, it can’t happen. There is no concerted group action within markets and there is no political power to “make” any one do anything. The best markets deliver efficiency and liberty by being “free.” No coercion.
And no “us.” Note that the expression we have been using to sum up utility in our market only asks people, as individuals, to judge their individual circumstance. There is no “we” in Δ∑IUj.
Markets overweight the individual over the group
So, we have now run into the first “fundamental flaw” of all markets. Every market overweights individual values over the priorities of the group. Since markets are based entirely on individual win/win trades, there is no medium for expressing what the community might want. We may be saddened, as a group, for your refusal to come to Ed’s assistance, but there is no mechanism within a market for us to do anything about it.
And what about Tracy, who was stuck with the solid lead hat? She would love to trade, but no one will trade with her. How will she remedy her situation?
Well, she won’t. She has no way to trade herself upwards because she has no goods to trade. You can’t pull yourself up by your bootstraps if you don’t own boots.
Markets overweight the prevailing distribution of resources
Here is the second “fundamental flaw” of all markets – they inevitably overweight the prevailing distribution of resources. In other words, at any given moment, who has what within the market will, to a large extent, determine the trades that will take place. If you start with nothing to trade, the market will by-pass you entirely.
The rich will, therefore, stay rich and the poor will, perforce, stay poor.
So, we see that the sick and the poor (Ed and Tracy) have no way to use the market to address their needs, due to these fundamental flaws of the market.
In Part 3, we look at the third fundamental flaw of any market, that markets “overweight the instrumental over the intrinsic.” It all has to do with the difference between being my friend and being my taxi driver. But more on that in the next posting.
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