Organization: Penn State University
Date: Wed, 16 Dec 1992 10:16:20 EST
From: <DGS4@psuvm.psu.edu>
Newsgroups: talk.politics.medicine
Subject: Re: HIAA and Reform
 <1992Dec15.094845.28910@genie.slhs.udel.edu> <92350.120320DGS4@psuvm.psu.edu>
 <1992Dec16.112643.26876@genie.slhs.udel.edu>

In article <1992Dec16.112643.26876@genie.slhs.udel.edu>,
starr@genie.slhs.udel.edu (Tim Starr) says:
>
>In article <92350.120320DGS4@psuvm.psu.edu> DGS4@psuvm.psu.edu writes:
>}In article <1992Dec15.094845.28910@genie.slhs.udel.edu>,
>}starr@genie.slhs.udel.edu (Tim Starr) says:
>}>
>}>In article <92349.194344DGS4@psuvm.psu.edu> DGS4@psuvm.psu.edu writes:
>}>
>}>}I think part of the problem is that you and other libertarians believe
>}>}that a free market, in the sense of no government involvement, could
>}>}exist.
>}>
>}>And you don't?  I've never heard that from an economist before.  Why not?
>}
>}Public goods will always require government intervention.
>
>Possibly.  I haven't made up my mind about this yet.  I'm waiting at least
>until I read Califano's book on externalities and welfare economics "in an
>open-ended universe: An Austrian perspective."
>
>The establishment
>}of a legal system without which tort is impossible will always require
>}government intervention.
>
>False.  See Friedman's "Machinery of Freedom," and Benson's "Enterprise of
>Law: Justice Without the State," the two canonical books on the subject.

One of the implications of public choice is that much government
intervention is the result of privately rational actions by private
individuals and firms and public officials and agencies.  The key point
I have been trying to make is that it is impossible to separate the
"private market" from "government".  Even if libertarians could construct
their theoretically limited state, it would be under constant pressure
to become more involved in the economy.


>
>}I would agree
>}with most economists that in most cases less government intervention is
>}better.  I happen to believe that health care is not one of those cases
>}The reasons why I believe that are numerous and include the importance of
>}externalities in health care, the widespread nature of asymmetric
>}information in health care markets,  the large amount of uncertainty about
>}the productivity of medical care among both consumers and producers, the
>}failure of the tort system to deter negligence in medical care....
>
>All important concerns.
>
>}>I look at the current system and see that many of the
>}>}problems result from elements (asymmetry of information, adverse selection,
>}>}decision-making under uncertainty) which would exist whether or not the
>}>}government intervened or not, even if the latter were possible in practice.
>}>
>}>None of which refutes the possibility of laissez-faire.  The libertarian
>}>economic argument I'm aware of doesn't deny these possibilities, but merely
>}>argues that the State only tends to make things worse.  Where have you
>}>known any utopian claims that everything would be perfect if only we
>}>smashed the State?
>}
>}But in making the argument that the State only tends to make things worse,
>}libertarian economics often employ a model of the free-market economy that
>}doesn't (and couldn't, IMHO) really exist. Canadian economists Morris L.
>Barer
>}and Robert Evans accurately summarize this method of argumentation:
>}
>}"But their grounds for this conclusion (i.e. that an efficient market system
>}could be created) seem only to be that they are able to imagine a
>hypothetical
>}system they believe would be superior to any presently in existence.  To
>}paraphrase...the relevant comparison for the national health insurance
>}debate in the U.S. is between a public monopoly system and a well-designed
>}but practical private insurance system.  Again faith triumphs over
>experience,
>}imagination over reality."
>
>I HIGHLY suspect that the crux here is the "efficient market" definition.
>Care
>to explicate this assumption?

It is not really an assumption, but a definition.  An efficient market system
is one in which marginal benefits are equated to marginal costs.  The problem
B&E point out, which I feel many libertarians fall into, is comparing the
operation of a real system to a hypothetical market system.  The real question
concerning any public policy is whether its removal improves or does not
improve the efficiency of the real system.  Take our licensing example.
You argue that licensing raises costs.  I agree with that.  I also point
out that licensing can affect the demand curve, which might increase
prices as costs fall, because it might increase the monopoly power
of firms by raising search costs, thus reducing search.  Licensing
might also provide consumers with an indication of quality.  On net,
which do consumers prefer?  It seems to me that you are arguing that
the rich and the physicians impose this policy of licensing on the
rest of us. Yet, I see little indication that many Americans want to get rid of
the licensing system.  I'm inclined to believe that the relationship
between physicians, the rich, and the state is reinforced by an agreement
by many other consumers that licensing provides benefits beyond costs.

I would argue that
the libertarian conclusion that lowered costs=more consumer welfare
applies primarily to a
hypothetical world of perfect competition where all goods are homogeneous,
there exist numerous producers and consumers, information is symmetric
and meaningful about prices and quality, there is free entry and exit,
and there are no externalities.  When such conditions are not holding then
it is not appropriate to assess the efficiency of the market by comparing it
to perfect competition.  The theory of the second best argues that it
cannot be shown that if some distortion (in the sense that P not equal to
MC) is removed, consumers will move closer to the Pareto frontier if
other distortions are present.

My argument is that some of the "distortions" in health care are
not the result of government policy, but the result of fundamental
elements (i.e. the uncertainty, externalities, asymmetries, I mentioned
above) that will exist even in the absence of government policies.
To me the government policies reflect not only attempts by private
parties to capture profits through legal restrictions, but attempts
by consumers to create social structures that deliver welfare in
areas when markets do not (Arrow's "Uncertainty and Welfare Economics
of Medical Care) meet expectations or desires.

The arguments of libertarians about the removal of legal restrictions
IMHO fails to address either the underlying distortions or the
possibility that the legal restrictions may, in fact, reflect consumer
desires.  Tony asked a questions a while back on whether a fully informed
consumer should be allowed to contract with any medical provider (I think
I have that right).  Tony chided me for my answer, when, in fact, I think
he misunderstood it.  How can a consumer be fully informed, when the actual
transaction that takes place between the consumer and the provider is
information (about the condition, about the productivity of various
alternatives, etc.)?

Your old friend Stiglitz showed that when there are asymmetries of
information of this sort, a competitive equilibrium may not even
exist. Public policy may establish rules which allow a market to
develop.  While you probably want to set up a system that involves as
little government intervention as possible, when such distortions
exist, they may require public involvement for any market activity to
occur at all.

"Professionalism"  is one way in which societies have, in fact, tried to
create a class of individuals who do not take advantage of the
information asymmetry (with varying degrees of success).  What are some
of the alternatives?  What would your system do to make sure that
providers fully inform consumers?  I'll tell you at the outset that
I do not think relying on a tort system (public
or private) to penalize negligence will work.  There is simply too much
uncertainty about the productivity of medical care.  Studies of the tort
system show that only about 5% of those injured ever receive any compensation.
What would you do?  Would you re-define negligence?  How?  I know that
you do not like to rely on a definition of deviance from standard
practice.  Given that it is extremely difficult to prove the efficacy of
any given medical intervention, and adding in the enormous problems of
interpretation and diagnosis, how would your system work? Would it work better
than the current system which relies on professionalism?




>}>
>}>}You, on the other hand, compare the current state to some idealized,
>}>}nonexistant free market can conclude that government is the problem.
>}>
>}>I haven't done this, nor has Tony.  We've never claimed that a libertaria
>}>would be a perfect utopia.  There's a good reason that "utopia is not an
>}>option" is a classic libertarian slogan.  Actually, this is the classic
>}>method of argument of socialists: compare "actually existing capitalism"
>}>to allegedly possibly socialist utopias; never "actually existing socialism"
>}>to "maximal capitalism."
>}
>}Well, I compare our system with a large private component, our system
>}prior to Medicare with an even larger private component, and most systems
>}in Europe, and I conclude that their systems deliver more consumer
>}satisfaction.  Why do you believe that a move towards a more private
>}market system would improve things?  Try in making your argument to avoid
>}an appeal to a hypothetical but nonexistent free market for medical care.
>
>Pheh.  Suppose our positions were reversed: we all had free markets in this,
>and you were challenged to support your claim that state intervention could
>improve things without recourse to theory or "hypothetical but nonexistent"
>states of affairs.  You couldn't do it, because it's impossible.  Isn't
>this merely Institutionalist empiricism to the point of abandoning theory
>for "data"?

I have explained in detail both in theory and in reality why I think a system
with significant government involvement is better.  I can point to systems
which have high levels of government involvement and high levels of reported
satisfaction.  I have outlined theories that reasonably replicate the real
world and predict that state intervention can actually have benefits.
I'd like to hear your theories that truly address the inherent distortions
that hinder private market operations in health care.  I'd like to hear
historical examples of health care success using private markets.  I am
not anti-free markets, even in health care.  For example, I'd like to see
any changes in our current system exempt long-term care.  Private insurers
are just beginning to enter this markets (thanks to lots of data collection
and information dissemination by government) and could contribute to paying
for this care.  I'd like to see fewer restrictions on the activities of
allied health workers.  I'd like to see states allow insurers to exclude
providers from plans (some states have "all provider" laws which restrict
this).  When I look at each individual state intervention, I try
to understand why it developed and what the consequences are for its
removal or retention.  IMHO that is not always the case with libertarian
arguments.
Dennis G. Shea, Penn State
<<DISCLAIMER>>
Ain't nobody's bizness but my own. I'll be happy to accept all
the credit for anything I've written.  It's funny, however, how
employers only acknowledge the profitable ideas.