Feedback, knowledge and the division of labor

by Russ Roberts on January 31, 2008

in Health, Prices, The Profit Motive

Arnold Kling over at EconLog tells the poignant story of worrying about his father’s health care. Anyone who has had a loved one in the hospital can relate. There are a lot of smart and caring people involved in the treatment, yet no one is overseeing the process and noting the interactions between this specialist and that one. No one is watching the heart rate zealously. The overworked nurse under pressure from another patient fails to note something crucial on the chart. Lots of cooks but no one’s in charge. Usually a family member has to play that role, a family member who more often than not doesn’t have the time for the full-time assignment and more than often not doesn’t have the expertise other than to ask a lot of questions.

Economists talk about the power of specialization and the division of labor. Economists talk about how well things can work when no one’s in charge. In the hospital though, it appears not to work as well as it might. Lauren in the comments to Arnold’s post asks the right questions:

For which kinds of economic entities does division of labor break down?
Why is it that sometimes having no one individual in charge is the
economic ideal that is coordinated by the invisible hand, and other
times not?

One answer is that maybe it works better in the hospital than it looks. Would we really want our parents in the hospital to be treated by a generalist? There are enormous amounts of knowledge and technology being brought to bear in curing people in a modern hospital.

But it clearly could be so much better than it is. We want the benefits of specialization without the costs, the same way we get them in other areas of our lives. What we want is someone to coordinate the process, someone other than ourselves to look out for the hammer-nail problem. All the specialists I’ve known are people with a hammer. Everything looks like a nail. The surgeon wants to cut. The oncologist want to give chemo. Beside the interaction problem, you want to make sure you don’t have a specialist blinded by too much specific knowledge who fails to see the bigger picture

So why do we need someone in charge in the hospital but not in the graphite industry? In the graphite industry, there are plenty of pencils, tennis rackets and fishing rods and the dozens (thousands?) of products that use graphite. We don’t need a graphite czar to make sure there’s enough graphite to go around. All the specialists that contribute to those products don’t get out of control. Their interactions don’t get ignored. As Hayek pointed out, the knowledge gets coordinated without a coordinator. Why does it work there but not in the hospital?

The simple answer is that the price system and profit motive interact in the graphite industry causing the whole thing to work smoothly without it being anyone’s intention. The prices and the profit motive lead to feedback and accountability. There are a whole bunch of people with the incentive and the information to make the system work well.

The simple answer is right. But it cannot explain why other organizations work well without prices and profits. Within a firm and within a family, resources and decisions get made without prices and often without profits. The answer (as Coase understood and as Lauren notes in her comment) is that in these organizations, the savings in transaction costs overcomes the loss of feedback and information benefits from using prices. But there are still incentives. There still is a residual claimant who bears the costs of failure and the benefits of success—the boss or the parent. Love motivates the parent. Bonuses and keeping your job motivate the boss.

So why doesn’t a hospital work better? The answer I think, is that the level of specialization in medicine has emerged from a process that has very few incentives to make sure that the level of specialization is as productive as it should be. There are very few informational feedback loops. Very little accountability. Sure, if a surgeon leaves a scalpel in your chest cavity and sews you back up, the surgeon bears a cost. And as a result, it doesn’t happen very often. But the kind of errors that Arnold worries about, the kind of errors that I’ve worried about with my Dad in the hospital (and the kind I’ve seen made) are the ones that have little or no consequence to anyone other than the patient.

These errors are built into the system. When a drug leads to unexpected side effects because the right questions weren’t asked, when an opportunity for a safer treatment is missed, when an aggressive treatment for one illness weakens the immune system and leads to other problems, who can you blame? Who bears a cost other than the patient?

You can blame the hospital of course, whatever that means, but the costs to the human beings who work in the hospital are small. There are no feedback loops within the hospital to reward generalists who look for the costs of specializations. And the reason there are not is because the patient is not the customer. The patient is not paying the bill. The financial incentives that do exist are coming from Medicare and Medicaid and the insurance companies. The normal feedback loops that protect the customer from error and greed and simple stupidity are missing. In a way, it’s amazing it works as well as it does. It works as well as it does presumably because most doctors and nurses do care about the lives in their hands. But it’s imperfect and could be much better.

And because there isn’t a residual claimant within the hospital, it is left to the wife or the husband or the parent or the child of the patient to represent the patient’s interests in the face of the decentralized incentives presented by the hospital and its specialists. Ironically, the monitoring and feedback comes from the family, another organization that is usually not using monetary incentives to improve performance. But the love works pretty well.

But the patient who is unrepresented for whatever reason, who must rely on the system itself to keep an eye on the treatment regimen is at a greater risk than the patient whose wife is a doctor or better yet, a loving doctor or better yet, a loving doctor who is at her husband’s side 24/7 until he comes home safely.

It’s a flawed system that will stay that way until the incentives change. In the meanwhile, my heart and prayers go out to Arnold and his Dad and to anyone with a loved one at a distance going through a medical challenge.


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