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Markets Don’t Work in Health Care?

At Marginal Revolution, Tyler today quotes (and intelligently challenges) Paul Krugman; says Krugman:

There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work.

First of all, I can list lots of examples of successful health care based on the principles of the free market: the regular, smooth, widespread, and affordable supply of aspirin, bandages, decongestants, toothpaste, dental floss, toothbrushes, contact lenses, running shoes, and gyms.  I could go on.

But, of course, Krugman (rather circularly) is referring to those health-care services and products that are typically believed today to be poorly supplied.  So let’s play along.

A good rule of thumb is to always be very skeptical when someone — even if he or she boasts a Nobel Prize — proclaims that “markets don’t work” for this particular good or that particular service.  That person is either a special pleader (such as the college professor who insists that markets don’t work to supply education) or he or she is someone with an excessively narrow (and, hence, mistaken) understanding of markets.  Alas, far too many economists have an excessively narrow (and, hence, mistaken) understanding of markets.

I recommend to Krugman (and to Kenneth Arrow, Paul Samuelson, Joseph Stiglitz, the ghost of George Stigler) and to too many other economists, great and not-so-great, to name, that they read Jim Buchanan‘s 1963 Presidential address to the Southern Economic Association; it’s published as an article entitled “What Should Economists Do?”  Here’s a key passage (which appears on pages 31-32 of a collection of Buchanan’s essays by the same title):

The motivation for individuals to engage in trade, the source of the propensity [to “truck, barter and exchange” – Adam Smith (1776)], is surely that of “efficiency,” defined in the personal sense of moving from less preferred to more preferred positions, and doing so under mutually acceptable terms.  An “inefficient” institution, one that produces largely “inefficient” results, cannot, by the nature of man, survive until and unless coercion is introduced to prevent the emergence of alternative arrangements.

Let me illustrate this point and, at the same time, indicate the extension of the approach I am suggesting by referring to a familiar and simple example.  Suppose that the local swamp requires draining to eliminate or reduce mosquito breeding.  Let us postulate that no single citizen in the community has sufficient incentive to finance the full costs of this essentially indivisible operation.  Defined in the orthodox, narrow way, the “market” fails; bilateral behavior of buyers and sellers does not remove the nuisance.  “Inefficiency” presumably results.  This is, however, surely an overly restricted conception of market behavior.  If the market institutions, defined so narrowly, will not work, they will not meet individual objectives.  Individual citizens will be led, because of the same propensity, to search voluntarily for more inclusive trading or exchange arrangements.  A more complex institution may emerge to drain the swamp.  The task of the economist includes the study of all such cooperative trading arrangements which become merely extensions of markets more restrictively defined.

Textbook economic theory blinds too many who master it to the myriad cooperative ways — ways broader than simple arms-length exchanges — that persons seeking each their own best advantage creatively figure out mutually advantageous means of cooperating.  The research of the great Elinor Ostrom supplies just some real-world examples.

Quoting Buchanan and linking to one of Ostrom’s books hardly proves that cooperative, mutually advantageous arrangements to better supply health care would happen if government removed its bulky, blind, and burdensome self from this arena.  But it does expose the limited intellectual purview of Krugman (which, again, he shares with most modern economists).  And so pronouncements made from the vantage point of persons such as Krugman ought to be treated skeptically.  Reality is more creative than the typical economist realizes.