But What The Hell Do I Know...

This video does a great job of summarizing the fundamental flaws in “single-payer” or quasi-single payer government health insurance schemes such as the systems in much of Western Europe (and, yes, the “public option” is unequivocally a pathway to single-payer). It really is an excellent summary.

Third-party payment is a big problem because nobody spends other people’s money as prudently as they spend their own. But the price controls and calculation problems inherent in government-run healthcare systems are perhaps the biggest problem that’s the least understood by most people.

Price controls are arbitrary prices set by government dictate. The problem is that they don’t adapt to changes in supply and demand. The result is unnecessary shortages, rationing and avoidable sickness or death. Why?

The Problem with Price Controls

Lets imagine a simple scenario:

A material used for the production heart stents becomes scarce. It doesn’t matter why. The result is a temporary shortage of these life-saving medicare devices. What comes next is the key.

In a market system with voluntary pricing, the reduced supply will lead to prices being bid up for stents. As the prices for the final good are driven up, the profits being made by stent producers rises. This is usually the point where politicians step in to decry that producer’s are “gouging” or making “excessive profits”.

But just wait.

Those higher profits are the incentive that attracts new entrepreneurs and profit-seeking problem solvers into the market for stents. As new suppliers come into the market, perhaps inventing alternative stent designs or refining existing production to be more productive, the supply increases. With the increased supply, the price (and profits) fall.

Market prices and profits are a signal. They’re information of an opportunity, and a flaw, to be filled and fixed. A price control scheme (such as the pricing in Medicare) that keeps the price of stents from rising as supplies dry up may “feel” more “fair” because it forces the rich and poor to wait in line rather than only those who can afford the higher price get the procedure. But, tragically and fatally, the unintended consequence of such a control is that it prevents the system of signals and incentives that coordinate the urgent need with new supplies. 

You may be thinking: won’t the government authority adjust their price controls or provide subsidies to encourage new supply? Certainly for some items, especially those provided by powerful firms with big lobbying operations. But in a complex system with literally millions of components in thousands of supply chains, it’s impossible for any central authority to keep track of the supply and demand throughout the system. That’s what prices do. They coordinate people’s actions in a complex system of most anonymous exchange.

The Cornucopian’s Have it

If that sounds like too rosy a picture of the market system, consider the results of Simon/Ehrlich Wager.

The year 1980 was a time when many people thought that the earth was running out of its precious natural resources. Simon, an economist who died in 1998, contended that human ingenuity would always come up with substitutes if needed. Thus humanity would never run out of key materials. In contrast, Ehrlich, a neo-Malthusian biologist, contended that overpopulation and excessive consumption were already forcing shortages of key materials and that this trend would continue.

Simon and Ehrlich agreed that rising prices would be a sign that raw materials had become scarce. Simon offered to bet that any raw materials selected in one year would be lower in price ten years hence. Convinced that prices would go up over the next decade, Ehrlich and two colleagues responded to Simon’s offer.

So, in October 1980 Ehrlich and his colleagues picked five different metals (chrome, copper, nickel, tin, and tungsten), spending $200 on each metal. The total investment was worth $1,000 in 1980 prices. If, in October 1990, the value of the five metals at their original 1980 quantities, adjusted for inflation, turned out to be greater than $1,000, then Ehrlich would win the bet. If the value were less, Simon would win the bet. Whoever lost would be required to send a check to the winner equal to the difference in value.¹

In October 1990, the price of the basket of metals had fallen substantially below its 1980 level. All the metals had experienced a drop in value. Moreover, the drop was so substantial that Simon would have won even if the values hadn’t been adjusted for inflation. Ehrlich and his associates sent Simon a check for $576.07 (Tierney 1990, 81).

How could the prices of scarce metals considered doomed to dry up in 1980 have fallen in price a decade later? The world is always changing. People are creative and find alternatives, just as they would for that shortage in stents if given the incentive to try. When gas prices go up, more people buy a Prius and more car makers build hybrids to compete.

Still, this bet should sound familiar today, as many in this world continue to profess the Malthusian view of pending resource doom. It is this static view of the world that underpins all socialism and price-control schemes: there’s a fixed pie so lets divide it up as equally as possible. 

But this view isn’t consistent with history. Even stranger for the socialist concept is the paradox of human nature it requires one to accept. At once, man is deemed too wicked to be allowed to benefit from market profit  and yet a handful of politically elected or appointed men from this wicked lot will somehow be so noble as to dole out a scarce benefit equitably and justly. That is an untenable position. If people are so noble, surely they should be granted the benefit of the price system to help coordinate their efforts in providing the world what is needed most.

Finding solutions to every problem or shortage isn’t a guarantee. The marvel of the market is the marvel of human inventiveness but it isn’t magic. What is guaranteed though, time and time again, is that price controls lead to needless long-term shortages, waiting lines and sometimes death...

…but what the hell do I know?