I was reading a debate on healthcare in the recent Newsweek. The prominent Democrat supported some sort of national healthcare while the prominent Republican supported more of a free market approach. Most people will probably take sides based on their assumptions about government efficiency versus market efficiency.

An old joke that works as its own punch line goes "I'm from the government and I'm here to help." Most people in this country reflexively believe the government will screw up anything it touches. There's plenty of evidence for that view.

But I wonder if government can be more efficient than the free market in specific situations, specifically in situations where the service is more about software than headcount, and where nothing needs to be invented.

Imagine a situation where you are deciding if a particular service should be handled by the government or by a hypothetical free market dominated by three players. The government's incentive is to provide the service as cheaply as it can. Any company's incentive is to transfer the greatest amount of money from consumers to stockholders. And to do that in a competitive industry you usually end up with what I call confusopolies. A confusopoly is a situation in which companies pretend to compete on price, service, and features but in fact they are just trying to confuse customers so no one can do comparison shopping.

Cell phone companies are the best example of confusopolies. The average consumer finds it impossible to decipher which carrier has the best deal, so carriers don't have normal market pressure to lower prices. It's a virtual cartel without the illegal part.

The advantage of a free market system is innovation. The market has an incentive to try new things. Governments prefer to avoid risks. If you need innovation, you want the free market.

In the case of national healthcare insurance, I ask myself these questions:
  1. Is it more about software than headcount?
  2. How important is innovation?
  3. Is the free market for this service a natural confusopoly?

Before you call me a socialist, I don't have an informed opinion on national healthcare. But I also don't have an automatic bias in favor of a free market that gave us Enron, WorldCom, Madoff, derivatives, and mortgages to hobos. I think you have to look at the specifics.

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+2 Rank Up Rank Down
May 7, 2009
You've had this line quoted already, but "The government's incentive is to provide the service as cheaply as it can." points out something that hits very close to home for me.

I'm going through medical school right now, and to be honest, it sucks. Not just the tuition, (Which is very expensive) But the massive courseload, the homework, and the unpaid internships. My youthful zeal to be a doctor so I can help people, while not vanished, is not what's keeping me going. This is capitalism, I'm only going through all this work so I can be paid for it. It's all well and good for the rest of you to say that us doctors should provide our services cheap to everyone, but even after we get our degrees, it's a complicated, demanding field.

Under a socialist healthcare system, like many of those seen in other countries, the government pays all of the doctors a flat fee, that is far lower than they would have seen in a capitalist system. This effectively destroys students' motivation to become doctors in the first place, and we have seen a dropoff in medical school applicants in recent years in many of these countries. This has resulted in the remaining doctors being overworked, and still underpaid, so many of them are retiring early, thinning out the experienced wisdom in the field.

It's one of the old complaints about socialism. If you pay the ditch diggers and the doctors the same thing, nobody is going to go to school for 8-10 years to become a doctor. Capitalism rewards those who work hard, and that keeps people working.
+1 Rank Up Rank Down
May 7, 2009
I'm just going to pitch in and agree with several of the earlier commenters. The govenment has no incentive to provide services cheaply, and reaps no rewards for keeping costs down. Their only real incentive is that providing services is an opportunity to build addition bureaucracy and consolidate power.
May 7, 2009
rubemode is right. 1, no, 2, very, 3, hell yes for almost everything but cancer care yet cancer care seems to be one of the present system's largest failures.
May 7, 2009
The fallacy of your argument is, as pu239 (Nice user name by the way! You wouldn't work at Los Alamos would you?) said, the goal of government is not to do things cheaply. The goal of government, ALL forms of government, is to increase your power and build a bigger bureacracy than the next manager at your pay grade. You do that by hiring more people, creating more forms for those people to process, and whining that you don't have enough people to handle all the forms you have to process. See a vicious cycle forming here?

iv911, you say the US is ranked 37th worldwide in healthcare. How? By number of people treated? By number of diseases cured? By number of new treatments developed? By waiting times in the emergency room? By not applying crappy socialised treatment to all patients? I'd like to know a little more about the ranking criteria. I'm always reminded of my statistics professor who reminded us at least once a week: "Figures lie and liars figure".
May 7, 2009
An interesting framing of the debate. Free market innovation has certainly given us new products like viagra and rogaine that have created a lot of wealth for the pharmaceutical industry. Of course if that research money, energey, and talent had been used to research a cure for cancer, maybe we would have one by now. Unfortunately a cure for long term diseases isn't as profitable for big pharma as ongoing treatment.

The biggest problem with health care shopping, is that you don't know how well it works until you get sick. Kind of like how you don't know how crappy a company's help desk is unless something breaks. No one really knows how bad our health care system is until it's too late. There's an old joke that asks, "What do you call a sick Republican? ......................... A Democrat." The joke being that anyone who has gotten sick and possibly screwed by a health care beaurcrat suddenly doesn't mind a government beaucrat if it means it will cost less.
+3 Rank Up Rank Down
May 7, 2009
The government has virtually no incentive to provide services cheaply or efficiently, they merely have an incentive to provide services.

Free market advocates would argue that crony capitalism is to blame for Enron, Worldcom, and Madoff, not a truly free market system.
May 7, 2009
Also, confusopoly is the best definition of the majority of the US's businesses. I would suggest a government entity to help consumers get real comparisons between brands, but can't imagine an easier system to game. If you happen to read this comment, Scott, could you do a blog post about Affirmations from the Dilbert Future book? Do you still do them, are they effective, etc..
May 7, 2009
Your "Before you call me a socialist ...." had me wondering why socialism, in America, is dreaded more than leprosy. Are socialists lepers?

In Indian politics, which is multi-partisan, we have a left, a right and a center (speaking in very broad terms). The bi-partisan US polity only has a right and a center. Well - some call it a left sometimes, but it is really a center. Why don't you have a 'real' left? Or does the concept of freedom have an exception (as in "embrace any ideology you like as long as it is not socialist")? I ask, with much interest, as a curious external observer.
May 7, 2009
"The government's incentive is to provide the service as cheaply as it can. "

Your economic logic is usually spot-on Scott. This time I see no incentive of the government to provide anything as cheaply as it can. They play with other peoples' money.

The line should read : The government's incentive is to take bribes aimed at granting special interest groups the privilege of providing services with barriers from competition.

Though I agree with you that we should be skeptical of markets too, for the exact reasons you state.
May 7, 2009
I think the problem is that at the individual level, most government employees are basically trying to transfer as much money to themselves as possible (or at higher levels, getting relected/appointed, which is essentially the same thing). The only way we'll have a functioning government anything is transparency to an embarrassing level. Politicians will have to live like monks.
+2 Rank Up Rank Down
May 7, 2009
Just for a change, lets look at the real world as an example. Every single other industrialised country has a healthcare system run, in whole or in part, by the (big, bad, scary SOCIALIST) government.
The USA does not.
The result, according to the WHO, is an embarrassing disaster for the USA, in terms of both cost and average quality (taking all citizens into account, not just the rich ones). 37th globally, behind virtually all English speaking and European countries, whilst spending far more per person.

My only question is - why is the solution not blindingly obvious to all?

0 Rank Up Rank Down
May 7, 2009
I think you go wrong when you state "The government's incentive is to provide the service as cheaply as it can." Well, that may be the goal, but how often is it reality? Not often I would bet.
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