Tuesday, August 25, 2009

When choosing a pet, do you prefer unicorns or bunnies?

This is something like what the healthcare debate is about.  It’s not about real alternatives.  Rather, it’s about the choice between a realistic alternative that can actually extend coverage while lowering costs — the public option — and a fantasy: the “free market” option.

And health care is only the most readily available of industries that illustrate our fatal fetishistic fixation with the “free market” myth.  Our thrall to that myth makes it impossible to have a rational debate about almost any economic issue.  For vast swaths of the U.S. and global economies bear as much resemblance to “free markets” as do unicorns to real pets.

There is, for example, no free market in health care.  Most markets for health insurance in the U.S. are dominated by one or two players.  They easily collude to keep prices high, choices low, payouts at a minimum, and new competitors from entering.  This is exactly what both common sense and economic theory would predict when few firms dominate a market.  Economists call it “oligopoly.”

Hospitals operate as oligopolists as well.  I live in a small town in California.  It doesn’t matter to me that there are many thousands of hospitals across the country.  The “relevant” market for my health care needs extends only a few miles.  For most people in America, there are at most two “competitors” in the hospital delivery business, if that.  This is not a competitive market.  The lack of true choice and the vendors’ incentives and ability to collude, make a mockery of the idea of “free markets.”

Or consider the pharmaceutical industry.  Though there are many firms, the vast majority of the prescriptions, sales, R&D, and profits are controlled by very few companies.  In many critical drugs, because of our patent laws, there is only one provider.  And George W. Bush passed a $700 billion health care law that specifically forbade the U.S. government from using its buying power to secure lower drugs prices for government purchases.  So much for the rigor of competition.

There is simply no effective competition in these markets and the results show it.  The U.S. spends twice per capita what other industrial nations spend on health care with inferior outcomes.  Adam Smith, the founder of modern economics, foretold this when, in 1776, he wrote in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Posted via email from Jim Nichols

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