Post-Keynesian Observations

Understanding the Macroeconomy

Health Care Reform

with 3 comments

MAJOR REVISION: I decided to rewrite this post because I like the information I found later so much better than what I used at first. So, if for some strange reason, you are reading this for the second time, it has changed!

New Stuff

I keep thinking I ought to post something on this, but while I could speak in generalities I would really have to do some digging to get into the specifics. Health care is not my area. However, I found an outstanding article by Marshall Auerback and Randy Wray. I have known Randy for many years, and he is one of my favorite economists. He has a way of slicing through to the core of any issue. I don’t know Marshall, but I did just send him a friend request on Facebook!

I strongly recommend a careful read (or two or three) through this. It is well worth it. They are very negative regarding the reforms passed yesterday, but not for the reasons cited by most detractors (those not busy hurling racial epithets or calling Obama a baby killer–what a wonderful world we live in). Rather, they call into question the entire idea that health care can be provided via insurance, particularly private insurance. What our new reforms will basically accomplish, they say, is (ironically) even more private market power over our health. The private sector has every incentive to insure only the healthy and to refuse to pay out as often as possible. This is not their fault–they have stockholders who rightfully expect profits. But that’s why we shouldn’t leave health care (or police protection or national defense) to the private sector. They also figure, however, that the insurance industry is so deeply entrenched that we are basically screwed. I didn’t say it was an uplifting article!

If you don’t want to read that whole article, Randy posted a summary here:

But read the bigger article. It’s well worth it and you will emerge with a clearer picture of the situation than most members of Congress.

Old Stuff Part One

Before my big revision, I had been pointing people to this first: the web log of the Seton Hall University School of Law, Health Law, and Policy Program:

And this post on the economics of health care:

I still like it, but the Auerback and Wray paper is much better and more relevant to the current discussions.

Old Stuff Part Deux

I’ll also leave this from my earlier version, which argued that calling our current health care system a product of the “free market” is not very accurate:

Here’s a quick summary of some issues. First, the health care industry is hardly what you could call an example of the free market in action. Anyone who has taken introductory microeconomics knows that there is a long list of assumptions that must hold true for various efficiencies to result. For the existence of a perfectly competitive market (which is a theoretical extreme but the ideal to which we compare the real world in considering policy), you must have (among other things) identical goods and services (no Big Macs, just hamburgers), many sellers (so many that no single firm or small group of firms can possibly affect the price), perfect information (buyers need to know clearly and easily what they are buying), and easy entry and exit into the industry (“Hey, I think I’ll start a pharmaceutical company!”). None of these is even close to true in health care. It is a highly concentrated industry in which the buyer doesn’t know what they’ve purchased even once they have it. In addition, there are huge information asymmetries in the sense that the seller has a much better idea of the product than the buyer, and the products are hardly homogeneous.

Conventional economics calls this a “market failure,” or a situation in which the market will not provide the socially required volume of goods and services (education and defense are other common examples). In such an instance, you either do what you can to make the industry more competitive (if that is even possible, given the nature of the industry) or you end up with government involvement (as with the military, fire departments, and police, for example), and probably a bit of both. Geoff Hodgson, the economist cited in the above post, goes beyond that and argues for a different conception of the health care industry on the basis that one doesn’t choose to get a heart transplant in the same way one chooses to go to Wendy’s instead of McDonald’s.



It’s very good, albeit very depressing.


Written by rommeldak

March 22, 2010 at 8:22 am

Posted in Uncategorized

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3 Responses

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  1. Dr. Harvey,
    I have a couple of questions with respect to the remedies you would prescribe for a market failure. One of the major causes of a market failure is asymmetric information, like you described here. Akerlof was made famous for his paper that highlighted this information problem with his description of lemon used cars and eventually won the nobel. However, what most people do no realize is this market failure has been solved by market participants, in the form of carfax, autocheck among many other firm. My question has to do with the methodology post-keynesians follow. One of Keynes’ tenets was the market is filled with uncertainty. As you noted in your post, the health care industry is filled with uncertainty because of the information problem within this market yet you prescribe government intervention in order to solve this. Why is it that a few government officials with little or no information in the health care industry be able to solve this problem better than decentralized individual actors? I do not believe that market participants acting in a decentralized fashion would lead to a “perfect market”, but I do not see how a few government officials could solve the health care information problem better than the decentralized actors.

    Chris Mufarrige

    March 23, 2010 at 9:15 pm

  2. You mean by using that internet that was created using government funding? 😉

    Chris, if you don’t mind, I’ll answer your question in the context of the posts I’ll make over the next several days. If you think it hasn’t been answered, then please raise it again.


    March 24, 2010 at 10:18 am

    • Yes sir! Thank you Dr. Harvey.

      Chris Mufarrige

      March 24, 2010 at 11:17 am

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