Bastiat vs. Krugman

by Don Boudreaux on September 25, 2006

in Health, Risk and Safety

Last December, Paul Krugman was admirably forthright about his disdain for the competence of ordinary men and women.  Writing in the New York Times about health-care decisions, Krugman rhetorically asked:

is giving individuals responsibility for their own health spending
really the answer to rising costs? No.

….it’s neither fair nor realistic to expect ordinary citizens to have
enough medical expertise to make life-or-death decisions about their
own treatment. A well-known experiment with alternative health
insurance schemes, carried out by the RAND Corporation, found that when
individuals pay a higher share of medical costs out of pocket, they cut
back on necessary as well as unnecessary health spending.

Krugman dismisses without comment the likelihood that the vast majority of people will seek the advice of experts — MDs — when making deisions about health care, just as ordinarly people seek the advice of experts — say, electricians — when seeking advice about how to repair electrical wiring in their houses.

I recalled Krugman’s distrust for ordinary people’s decision-making capacities when I read this passage in Chapter 10 of Frederic Bastiat‘s book Economic Harmonies.  It’s interesting — and, I  believe, proper — that Bastiat saw freedom of choice as intimately connected with competition:

After all, what is competition? Is it something that exists and has a life of its own, like cholera? No. Competition is merely the absence of oppression.
In things that concern me, I want to make my own choice, and I do not
want another to make it for me without regard for my wishes; that is
all. And if someone proposes to substitute his judgment for mine in
matters that concern me, I shall demand to substitute my judgment for
his in matters that concern him. What guarantee is there that this will
make things go any better?
It is evident that competition is freedom.
To destroy freedom of action is to destroy the possibility, and
consequently the power, of choosing, of judging, of comparing; it
amounts to destroying reason, to destroying thought, to destroying man
himself. Whatever their starting point, this is the ultimate conclusion
our modern reformers always reach; for the sake of improving society
they begin by destroying the individual, on the pretext that all evils
come from him, as if all good things did not likewise come from him [emphasis added].

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{ 29 comments }

Bret September 25, 2006 at 8:21 pm

Don Boudreaux wrote: "… just as ordinarly people seek the advice of experts — say, electricians …"

A stunningly bad example in that in most places one has to follow the electrical code which was put together by "experts" – whether or not it makes sense for the specific application. Just as Krugman would insist the experts decide how healthcare should be chosen for you.

KRM September 25, 2006 at 9:20 pm

Any thoughts on how true free-market competition can keep medical coverage low? Is it even possible? Are the prices today a product of a degree of government intervention? I don't know much about this to come to an educated conclusion… Thanks for any insight you can give :-)

True_Liberal September 25, 2006 at 9:42 pm

Free market is alive and well in corrective vision surgery. It's virtually 100% non-insurance, and the cost trend is remarkably downward. Technology advances have revolutionized the cost and dropped the risk, and volume is growing like mad.

James Pyrich September 25, 2006 at 9:47 pm

Perhaps a better example, then, would be making long-term investments. It is usually considered wise to learn as much as you can about investing, but there are times where you should probably request information from an expert. And then there are those who don't want to be bothered with the details, but will pay somebody else to manage their finances for them.

Hopefully that's a bit better. :)

Don September 26, 2006 at 8:54 am

Buying a home is complex, but it is common enough and important enough to people that knowledge of the process is widely disseminated and experts abound to help you make proper decisions when buying a home. The diligent among us also avail ourselves of the deep resources of information to educate ourselves on how to buy a home. Thus it would be with health decisions. Many decisions would be quite rudimentary. For example, 16% of men will get prostate cancer. Average treatment costs are, say, $25,000. This is about as easy an insurable risk as there is. A man in his 30s could probably insure for this risk at about a buck a month or less.

brian September 26, 2006 at 9:19 am

I live in England where i have no choice but to be part of the National Health Service. My paycheck comes every month and the government takes money from me for health services, a pension, etc.

It does irritate me but I have always had such good treatment when ever I go to a hospital (and its "free") that I don't tend to think of it as the government "taking away my freedoms". Many (perhaps most) people in England are used to the idea of a health service funded with their money. They can also choose to pay insurance with private hospitals.

My father lived in Zimbabwe for a few decades and then developed blocked arteries. This coincided with Mugabe stealing land and distroying the Zimbabwean economy. My father moved back to his place of birth, Ireland, and received free operations and prosthetic legs. He would not have received treatment in the American insurance based system (I think).

Whilst I am a supporter of freedom of choice and competition (and I do get that little bit irritated when the Govt takes my money without asking) I can only think that my treatment in England at the hospitals is good and that my father wouldn't be alive without the European welfare system.

Steve September 26, 2006 at 9:25 am

Don,
Patricia Danzon has written regarding this same study:

For the great majority of participants, the difference in expenditures had no measurable effect on health, whether judged by objective measures or by the patients themselves.

Why does Krugman reach such a different conclusion? Is he reference outliers? If so, does it make sense to develop policy around these outliers?

Steve

http://www.econlib.org/library/Enc/HealthCareIndustry.html

Steve September 26, 2006 at 9:31 am

Brian,

Why do you conclude that your father "would not have received treatment in the American insurance based system (I think)." Is there some context we need to know about?

I would also suggest that both econometrically and perceptually that my British friends do not consider the cost
of the long wait for healthcare for non-emergent care.

Steve

brian September 26, 2006 at 9:54 am

Steve,

the reason I conclude that my father would not have received treatment in an insurance based system is because he was already very ill by the time he reached Ireland. Surely his medical fee would have been hellishly expensive (his current prosthetic cost in the region of €30,000)? Bear in mind that the millions of Zimbabwe dollars that my parents made from their two successful businesses was reduced to something in the region of €8,000 after the Zimbabwean economy collapsed.

I would be interested to know what exactly would have happened to my father in America given his circumstances. My interest stems from the fact that I have an American girlfriend who believes that America's health system is appallingly unfair towards the poor.

About the average Briton's attitude to the NHS, I don't know exactly how popular or unpopular it is. Only I have met very few people who are actively opposed to it in the 5 years that I have lived here.

Don September 26, 2006 at 10:12 am

Brian-
Like Steve, I think your assertion that your dad would not have received treatment in the US is wrong. Also, your example is well and good, but you have to call it what it is and see what else is going on. Young healthy people are providing the funds to cover the costs of your dad's surgeries. All well and good and some people may desire providing that subsidy so that they will get it when they are older and infirm. But contemplate someone like your dad who needs triple bypass surgery but was grossly irresponsible with health decisions throughout their life (drinking, smoking, bad diet, no exercise). That might change the desie to provide such a subsidy. People chafe at subsidizing destructive behavior as a matter of preferrence but it is also damaging economically in a broader sense. By placing the costs of bad health decisions more squarely on individuals, via risk based insurance, rather than dispersing them throughout society, we will get less of these bad decisions and the overall level of level spending will go down as preventable treatments become less necessary. This frees up resources for more difficult health challenges.

Steve September 26, 2006 at 10:24 am

Brian,

That context does indeed help. Your father would have likely been unable to acquire insurance coverage at all in America or at an exorbitantly expensive rate because of his pre-existing condition. Depending on how impoverished he was and on his age, he might have qualified for one of the many programs we have here to provide for the indegent. Or he would have been a "self-pay" patient. By law, he would not have been denied emergency care if he required it.

Most of my British friends are big proponents of the NHS although they also constantly complain about the wait time and bureacratization of care which explains why the private system there is thriving.

Have you listened to Russ's podcast on the American Health Care system. It is excellent. You can find it here: http://www.econtalk.org/archives/2006/07/cogan_on_improv.html

Steve

Steve

JohnDewey September 26, 2006 at 10:47 am

Brian,

My wife, a registered nurse, has worked in non-profit hospitals in several U.S. states over the past 30 years. She assures me that no one – absolutely no one – would be denied care for life-threatening illness or injury.

My wife has also worked alongside hundreds of surgeons. All of them excuse fees for patients they determine do not have the means to pay. The important point, though, is that the surgeons themselves, and not some government bureaucrat, determines who gets their charity.

What this charity means, of course, is that hospital and surgical fees to all the paying patients must be raised 10 percent or more. So, in reality, all Americans are paying for the care of the unfortunate and indigent.

We are not a heartless nation, Brian. We just have a different method.

Randy September 26, 2006 at 10:57 am

Wait time is a cost. It may be true that some will put off care due to the cost in dollars, but wouldn't we also expect to see many put off care due to the cost in wait time?

And now that I think about it, wouldn't long wait times actually be an advantage for nationalized care? If the goal is to provide care for all but drive down the cost, then wouldn't long wait times be an excellent incentive for those with minor problems to learn how to take care of themselves? It might even foster the creation of neighborhood clinics for those who prefer a small fee to a long wait when dealing with minor medical problems.

brian September 26, 2006 at 11:10 am

Don, I agree with you that placing decisions in the hands of individuals must be the best system. Mr Bastiat sums it up well above.

John, please don't get me wrong. I have spent hours defending America against people in what, I think, is becoming a more and more anti-American continent. I don't for a second believe you are a heartless nation (in fact, I think I am correct in saying that you are the most generous nation in terms of individual giving).

I'm glad I've had this conversation and heard about non-profit hospitals and surgeons who waiver payment for the poor in the US. To be honest, I think I will scream if I hear another person who says that there are 40m people in America who don't have medical insurance and who are frequently left to die on the streets.

JohnDewey September 26, 2006 at 11:43 am

Brian: "I have spent hours defending America against people in what, I think, is becoming a more and more anti-American continent."

Well, thank you! It's good to know we can so quickly put all this Ryder Cup animosity behind us.

Brian: "I think I am correct in saying that you are the most generous nation in terms of individual giving."

I don't know if that's true, but sometimes the giving doesn't even get counted. Some of our physicians and nurses spend vacations providing medical care in Third World countries. They do it quietly, so not too many hear about their generosity. I'm sure many British doctors also donate their time – their most precious asset.

David Z September 26, 2006 at 1:17 pm

"And now that I think about it, wouldn't long wait times actually be an advantage for nationalized care? If the goal is to provide care for all but drive down the cost, then wouldn't long wait times be an excellent incentive for those with minor problems to learn how to take care of themselves?"

But these are not mutually exclusive options – under nationalized health-care, everyone is already paying for the long lines. To insist that they have the "choice" to go elsewhere, and pay even more, well, that's just ridiculous. Of course they do. But to call this a "choice" is simply dishonest. Additionally, this sort of policy is terribly regressive – you don't need to see any facts or figures to understand that the poorest among us (who most need the assistance) are the least able to pay above and beyond the payroll deductions. Long lines make medical care sooner, rather than later, much more expensive than it otherwise would be. This is not beneficial to anyone – individually or in aggregate.

Aaron Krowne September 26, 2006 at 1:27 pm

In my experience doctors make poor experts, probably because their profession is so regulated and protected. I find that just a little reading, thought, and common sense combined with close knowlege of my own situation generally puts me in a position that rivals the expertise of doctors.

Anyway, they're definitely way over-priced for what you get, which makes sense, as they are the logical first and largest beneficiary of an inflationary, interventionist system.

http://br.endernet.org/~akrowne/writings/us_health_care/us_health_care

JohnDewey September 26, 2006 at 2:13 pm

Aaron Krowne: "I find that just a little reading, thought, and common sense combined with close knowlege of my own situation generally puts me in a position that rivals the expertise of doctors."

Then I'll pray for your continued good health, and for a tempering of your smugness.

Randy September 26, 2006 at 2:27 pm

David Z,

I should fill in some of the blanks. What I have in mind for national health care is not a replacement system, but an add-on. Use a one or two percent payroll tax to set up a new system that anyone can use, but limit it in accordance with resource availability. That is, the waiting times would be long and the care givers not the first rate.

Why this approach? Because our wealthy society is not going to accept a second rate health care system. We can initiate a two tier system, or we can keep arguing about this for the next couple of decades, while the services currently available to the poor rapidly vanish.

So yes, everyone would be pitching in for welfare quality services, but many would choose to pay again for higher quality services – and long wait times would be the primary motivator.

Randy September 26, 2006 at 2:46 pm

P.S. The government provides welfare, not healthcare. There is no reason that the funds necessary to provide welfare in the form of healthcare should come exclusively from the private healthcare system. A payroll tax provides a much broader base.

Adam Malone September 26, 2006 at 2:59 pm

Most of the comments to our British friend have ignored the fact the do have a system of socialized medicine. ALthough it doesn't apply to everyone it comes out our paychecks along with Social Security and the Income tax, I'm talking about medicare.

My sister-in-law has a prosthetic leg and also had cancer as a young girl. As a result of these things she is considered uninsurable. Therefore all of her medical care is paid through medicare. Almost 100% of her prosthetics and surgeries are paid for by the federal gov't in the US.

Brian, while your father's situation is slightly different than my sister-in-law's situation, I do believe that he would reeive medical care.

BlacquesJacquesShellacques September 26, 2006 at 8:34 pm

Where to start. I'm in Canada. I need to tell you the most pernicious part of state funded care.

Nobody gives a shit.

Sorry for the blunt language, but true. Oh sure, everyone in the health care professions pays lip service…care, concern, compassion, blah, yadda, blah. But they do not really care. The proportion of lazy-ass time serving is way too high.

Have you ever seen tile setting, or carpentry or painting in the old east block countries? Ever tried to flush a communist toilet? Do you want that attitude to pervade your system and govern, or even influence, the behaviour of your doctors and nurses?

My mother in law is in some pain, and has been for two years, because of a bad hip replacement. The pain is not 'awful', she's not a complainer. The system agrees she needs a new replacement hip. When? How? Why did it go wrong? Who knows. Like I said, nobody gives a …

Canada is maybe 2% or 5% or something % less efficient, less good, less aggressive, less whatever than the USA. Per annum. Compounded. Forever.

Trey Tomeny September 26, 2006 at 9:42 pm

We already get to make life or death decisions about our own treatment and I only wish we could make more. When my son was diagnosed with a brain tumor, we were offered many treatment options and had to make many decisions.

The decision we made was an experimental treatment that worked really well- until we were cut off due to the politics of drug trials. If you wish, you may read about it here- http://www.globalaging.org/elderrights/us/boyhope.htm which is a site that is duplicating the original Wall St. Journal front page article from December of 2003.

Our son left us for heaven a year ago. Until we are with him again, we will wonder if his life could have been lengthened by the decisions we did not get to make.

On the macro level, scourges like brain cancer would probably be cured by now if the free market was allowed to operate in health care- the biggest cost of our world wide system of goverment interference is the lost lives, not the lost dollars.

iceberg September 26, 2006 at 9:59 pm

Randy,

I should fill in some of the blanks. What I have in mind for national health care is not a replacement system, but an add-on. Use a one or two percent payroll tax to set up a new system that anyone can use, but limit it in accordance with resource availability.

I've got an even better idea- tax only those people who want to be included in your scheme for "national health care", and deny service to those who don't choose to contribute.

This solution would put an end the endless debate, as those who want the plan could sponsor it, and everyone else uninterested can decline the invitation and find their own way to pay their insurance for medical coverage.

From there we could go further, say to Social Security, et al. It would be wonderful and end the decisiveness that pits neighbor against neighbor in this country.

iceberg September 26, 2006 at 10:00 pm

Sorry- the first paragraph that I posted above is a quote from Randy's post.

Masum Ahmed September 27, 2006 at 6:25 am

"I would also suggest that both econometrically and perceptually that my British friends do not consider the cost
of the long wait for healthcare for non-emergent care"

This does not make sense, I think you mean non-emergency care?, Emergent means something totally different. And seeing something economically is seeing something perceptually, econometrics a whole different branch of economics it is used to put figures and values on factors and issues like waiting times.

You are using words and phrases out of context.

Randy September 27, 2006 at 10:31 am

Iceberg,

Re; "I've got an even better idea- tax only those people who want to be included in your scheme for "national health care", and deny service to those who don't choose to contribute."

Ideologically, I agree. Pragmatically, I have to disagree. The American people have already decided that they want welfare medicine. E.g., Medicare and medicaid do exist, the ERs are required to treat anybody who shows up, etc.

So my thought is that if we want to provide welfare, and apparently most of us do, then separate it from private healthcare. We will all pitch in to take care of the needy, but there is no reason to involve the private healthcare system in doing so.

Initiate a small payroll tax and build some clinics. Attach them to existing ERs so they are easy to get too. Attach a pharmacy stocked with generics only. Put in very large waiting rooms with TVs. Staff them primarily with PAs, RNs. Throw medicaid funds into the system immediately and phase medicare into it in 30 years. What the system can't handle, refer to the private system and/or charity.

fiona September 27, 2006 at 2:58 pm

In Florida it has been proposed to begin a system of reporting on certain procedures in hospitals (not doctors yet!) – cost, availability, number performed, complications, etc. This kind of reporting will make it possible to be an educated consumer.
Re the welfare – healthcare – our county currently taxes ad valorum for "indigent" care in the local hospital system.

Steve September 27, 2006 at 7:50 pm

Masum,

"Emergent" is a common phrase used in the American health care system to describe emergency care. Google it.

I am aware of what econometrics means. My point is that most studies cited by the MSM tend to focus on percentage of health care expenditures as a percentage of GDP. They do not tend to take into account the costs of lost productivity associated with long wait times for health care.

Steve

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