Tuesday, September 1, 2009

Economic wisdom for the ages

Don Boudreaux at Cafe Hayek (a daily must-read) had this post which I am reproducing in its entirety because it is so good.

The late Arthur Seldon offered a darn good, and nicely concise, list of the important foundational tenets of economics:

Production takes place for consumption (derived from the Scot Adam Smith), not the other way round. Value is measured not as an average but at the margin (the Englishman W. S. Jevons, the Frenchman Leon Walras, and the Austrian Carl Menger). The cost of producing a commodity or service is not the labour required (the German Karl Marx) but the commodity or service thereby lost (the Austrian Friedrich von Wieser). The instinct of man is to “truck and barter” in markets (Adam Smith). He will find ways round, under, over or through restrictions created by government (the Austrian Eugen von Bohm-Bawerk). There is no such thing as absolute demand (for education, medicine or anything else) or supply (of labour or anything else) because both vary with price (the Englishmen Alfred Marshall, Lionel Robbins and many before and since). Not least, without the signalling device of price, man cannot spontaneously and voluntarily co-operate for prosperous co-existence (the Austrian Ludwig von Mises and the Austrian-born but voluntarily-British Friedrich Hayek).

(From page 6 of Vol. 7 of The Collected Works of Arthur Seldon.)
Herein you have all sorts of nuggets: production comes first, consumption comes second; all the important things happen on the margin; free markets can triumph over all sorts of adversity; and price discovery is essential for prosperity.

This last dictum is especially important to the healthcare debate, since we most certainly do not have a price discovery mechanism in the healthcare market today. Since the consumers of healthcare are for the most part not the ones who pay the bill, there is no price discovery, there is no transparency, and there is no way for competition to work effectively to reduce prices and improve services. We must get rid of the third party payer problem if we want to have any chance of improving the healthcare industry. That can be accomplished very easily by changing the tax code: for example, let everyone deduct the cost of healthcare insurance. Why is this so hard for our politicians to understand?

8 comments:

Public Library said...

I definitely agree on the third-party payer. In addition to your suggestion, there should be further tax deductions for people who live healthier than others.

The healthy are subsiding the unhealthy in this country.

Scott Grannis said...

Why not let the market figure out a solution for those who live healthier? Auto insurance works that way with no help from the government or the tax code.

wupdike said...

Price Decovery. Why is this not obvious? The problem began or was made worse when the decision making and payment for medical services passed from the patient to third parties. The ordinarily normal oversignt of the consumer when the bill came in has been also transferred to a third party who has no idea of what was done. Without consumer involvement in healthcare transactions, there is bound to be increased costs and massive errors and worse, fraud.

Why is it so many people can't or won't see this?

CDLIC said...

Scott,

Excellent post!

If only the few economic principles in your post were taught in schools, understood and applied, we would not be in the mess we now find ourselves.

Jeff Kott said...

Sorry Scott, I didn't understand the last part of your post where you suggest letting everyone deduct the cost of health insurance.

Wouldn't it be better if no one could deduct the cost (i.e., eliminate the exclusion for employer purchased health insurance). That would make people even more sensitive to costs and with the extra $300 Billion a year in tax revenue we could afford to pay for at least basic health care for everyone without going deeper into debt.

Scott Grannis said...

I've written about this before, but the short answer is that letting everyone or no one deduct the cost of health insurance achieves the same objective, which is to break the stranglehold that employers have on providing health insurance. I chose to just list one alternative, since it is probably more politically palatable. Imagine the uproar if employers had to start paying taxes on healthcare benefits. In contrast, allowing everyone to get the deduction sounds a lot simpler, and the change wouldn't affect nearly as many people. What would eventually happen is that employers would decide to pass the money through to employees so they could purchase it directly. One less problem for employers.

djakel said...

Scott--Voila. Here is your plan already sitting in 8 committees: HR3400 introduced 7/30/09 by Tom Price, R-GA with 27 co-sponsors called The Small Business Health Fairness Act of 2009. It's only 63 pages, not 1,018.

http://www.box.net/shared/d2j4xpsak5

Pelosi will not report it out of committee. Plus the Media is once again AWOL. Colburn-Ryan was also introduced 7/30/09 in the House and Senate. Also stuck in committee. Two real free market alternatives almost no one even knows about.

Scott Grannis said...

Thanks for the link, I was unaware of this.