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.