I’m having an argument with a socialist who says that the free-market price mechanism results in an irrational allocation of resources (in this case healthcare) because it results in resources being distributed to those who can afford them and not necessarily those who need them. Hence, he says “the only way the price mechanism works properly is in a mostly equal society where people’s purchasing power is similar.”
I’m new to Austrian economics, can anyone help me with this one?
Thanks,
Jason
The price system is ABSOLUTELY necessary.
High prices signal large profits for firms. More firms enter the market. Firms try to produce more to make high profit. Expanding output leads firms to try and sell more products at progressively lower prices untill the market is saturated.
Example: Televisions used to be very expensive and only rich people had them. Because of the high price, more firms entered the market which was stabilized BECAUSE of the high prices. This allowed firms to develop TV technology and discover that TVs would even be a good thing. In retrospect it seems obvious that society would develop TVs, but in reality it is never clear whether a new invention will stick around. In this way, the evil rich people kind of pioneered the TV industry; taking a risk on one of the earlier expensive models.
Later, as more firms entered the market, the price of TVs was gradually pushed down as their quality increased. As a result, practically everyone has a TV nowadays, and we’re not calling for TV-socialism.
Moreoever, if you ration healthcare you take away one of the major incentives to gain wealth. The ‘evil’ capitalists will cut back on their projects, output will fall and your capital structures will be immature. The closer you move to socialism the closer you move to a dystopian demos, where everyone goes to their 9-5 desk job and doesn’t undertake any market activity.
So, in summary, ask him why TVs and computers are getting cheaper all the time and we don’t need technology socialism, even though I’d rather live to 50 with a computer than 100 without one… Why is healthcare getting more expensive all the time? Why does insurance suck? Could it have something to do with extensive protectionist regulations?? The limited supply of doctors by state boards lobbied by the AMA? Aggressive use of patent law? Requiring hospitals to acquire a certificate of need before setting up? The certificate of need is given by a local board consisting of all the other hospitals in the area.
Hey lets let burger king and wendy’s decide whether or not to let mcdonalds have stores in the city!
Chiropracters are a good example of a less cartelized industry. Their practices are much more efficient, competitive, and affordable than those of a doctor.
Just point blank ask him: IF all the regulations the free market advocates are complaining about would make health care as cheap and available as televisions and computers, would he still be calling for socialism?
People don’t buy more healthcare than they need. It isn’t like wealthy individuals go into hospitals constantly to get MRIs a few times per week. They’ll use the same amount of primary care that others do. Wealthy individuals can simply afford to do so more often. Plus, make sure to remind him that socialized healthcare will give people the authority to receive more healthcare than they need since they’re paying a set price. If I have to pay $10 per year for however much healthcare I need, I’m surely not going to hold back. I’ll go into the doctor whenever I feel like I might soon be sick because it doesn’t force me to pay any more than I would have without the treatment. Then hospitals lose money, taxes go up, unemployment goes up, and the income gap will widen. All because of a government-run monopoly called socialized medicine.
The free market system allows for the possibility of patient and doctor to set price, as oppose to insurance companies, or the government setting price.
As it stands now, there are so many middlemen thousands of miles away, created by government regulations, that attempt to allocate resources and services between the patient and doctor, why not have the patient and doctor do it themselves?
(My statement does not imply that middlemen in general are a bad thing, just middlemen imposed on individuals are bad.
What is far more important than any consumption-selection process is the production-selection process. The former is about how the pie is divided up. The latter is about how big the pie is in the first place. The free-market price mechanism results in an optimal allocation of resources because it results in factors of production being distributed to those entrepreneurs who can create the most abundance from them. And if you intervene in the free-market price mechanism or try to redistribute the wealth it builds, the productive process will seize up, and the “pie” will drastically shrink. “Distribution” and production are two sides of the same coin.
Mises, HA:
Interventionism is guided by the idea that interfering with property rights does not affect the size of production. The most naive manifestation of this fallacy is presented by confiscatory interventionism. The yield of production activities is considered a given magnitude independent of the merely accidental arrangements of society’s social order. The task of the government is seen as the “fair” distribution of this national income among the various members of society.
The interventionists and the socialists contend that all commodities are turned out by a social process of production. When this process comes to an end and its fruits ripen, a second social process, that of distribution of the yield, follows and allots a share to each. The characteristic feature of the capitalist order is that the shares allotted are unequal. Some people–the entrepreneurs, the capitalists, and the landowners–appropriate to themselves more than they should. Accordingly, the portions of other people are curtailed. Government should by rights expropriate the surplus of the privileged and distribute it among the underprivileged.
Now in the market economy this alleged dualism of two independent processes, that of production and that of distribution, does not exist. There is only one process going on. Goods are not first produced and then distributed. There is no such thing as an appropriation of portions out of a stock of ownerless goods. The products come into existence as somebody’s property. If one wants to distribute them, one must first confiscate them. It is certainly very easy for the governmental apparatus of compulsion and coercion to embark upon confiscation and expropriation. But this does not prove that a durable system of economic affairs can be built upon such confiscation and expropriation.
When the Vikings turned their backs upon a community of autarkic peasants whom they had plundered, the surviving victims began to work, to till the soil, and to build again. When the pirates returned after some years, they again found things to seize. But capitalism cannot stand such reiterated predatory raids. Its capital accumulation and investments are founded upon the expectation that no such expropriation will occur. If this expectation is absent, people will prefer to consume their capital instead of safeguarding it for the expropriators. This is the inherent error of all plans that aim at combining private ownership and reiterated expropriation.
This person is not really objecting to the price mechanism; he is objecting to scarcity and inherent differences amongst men. In other words, his grievance is with reality. He takes issue with the fact that some people are more productive than others, and as such, receive higher remuneration; he is upset because superabundance only exists in his fantasies, and because his own personal subjective preferences are not universal and categorical laws. Tell him that the price mechanism does not ration scarce resources according to the subjective and arbitrary whims of clueless do-gooders. It directs scarce resources towards their most urgent and productive employments, which, in turn, elevates the objective standard of living for all.
Equality does not exist in the social world, but fortunately for us, even the most intellectually and physically feeble individuals can prosper in a free society.
Brilliant. Thank you Grayson.
Thank you all so much for your great responses. All of them really helped out.
@Sieben - I like the “real world” example you used, TV’s & computers… it should be very effective with the average person who is not yet ready to understand more “advanced” arguments put forth
just last night my father decried the pay of sports stars and how poor people are FORCED to pay 30% interest rates on auto’s..
while I said I doubt anyone is charging 30% -(unless late fee’s non-payments etc) he could not see how if this did exist for a short time- soon there would be many competitors undercutting that 30% for a piece of that action.
also as shitty as your envy may feel when you see an uneducated ass making $10 mill a year - he not only receives his pay freely by the choice of those who want to see him play - his money also alows for more opportunity for more poor people than it would even if we redistributed every penny he has… again ,i like the real world examples.
@OP: The price mechanism doesn’t allocate a specific good to “where it’s needed most”. When Bush was in office, Cheney was having heart problems and I remember reading about him having a full-time EMT following him around wherever he went with defibrilator on hand. Now, anyone having heart problems would certainly want to have this sort of “intensive” care. If you think about it, it could be easily argued that they do, in fact, need it. In reality, only a select handful of multi-millionaires or billionaires could afford to take on a doctor on as a full-time caregiver.\
The price mechanism helps businessmen, speculators and other investors (and ordinary individuals… we are each our own “business” if you think about it) allocate resources by permitting those who can put a resource to a more valuable use to “push out” those who want to put it to less valuable uses by out-bidding them. Those who will put a resource to a more valuable use can afford to outbid those who want to put it to less valuable uses because they will earn a larger profit from its use. Consider a company that wants to manufacture corporate art pieces out of iron… they probably could not make a profit bidding against car manufacturers for the use of newly mined and smelted iron since iron put to the use of transportation is more valuable than that put to use to look at. So, they’d probably use scrap-iron or something other than iron.
The same goes for all the capital used in the healthcare industry - including human capital (doctor hours and medical university professor hours). Administrative bureaucrats can’t know what supplies, equipment and man-power is needed when and where better than the market can. The market permits entrepreneurs to move in and make a profession out of doing nothing but estimating demand for hypodermic syringes or vaccines or rolling beds or whatever. These entrepreneurs can apply their full ingenuity to finding ways to provide the same or better quality goods and services at the same or lower price. And - unlike bureaucratic administrators who receive a performance-review once per annum - these entrepreneurs receive day-by-day, week-by-week, quarter-by-quarter feedback on their success in the form of profit & loss. When they start losing money, they know almost immediately they are misallocating resources. Government bureaucrats, on the other hand, are paid from tax revenues, perform their requisitions out of tax revenues, and so on. There are no “losses” per se, just budget run-overs. But a budget is itself an arbitrary measure since some other bureaucrat cooked up the numbers in the budget. The market, on the other hand, is not arbitrary, the going price for something is what it is because no one will accept less or pay more for it. In the process of competing with one another for buyers, entrepreneurs are forced up the price/quality curve to provide the best at the lowest price, just like in any other industry. This is why government bureaucracies are so predictably lethargic and unresponsive.
The politicians just happen to have clever arguments (“we can’t let life-or-death decisions be made based on the bottom line!”) that the masses lap up like a kitten’s milk. This permits them to scramble the brains of 99% of the public and justify the central planning of medicine so the underachieving sons and daughters of the power elite will have guaranteed jobs as medical bureau administrators. That’s what it’s all about.
Clayton -