Tag Archives: Free Market

Competition Improves Healthcare?

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MedicalMoneyI really, really wanted to get to my backlog of scientific blog topics today, but was distracted once again by Shawn Spicer at his daily press briefing. In defending “Trump/Ryan Care,” he repeated perhaps a hundred times that “It is an economic certainty that increased competition unquestionably brings down costs.”

(Note that he uses the word “costs” but he presumably intends this to mean “prices.” Cost is really the cost of manufacturing a product. Price is the cost to the consumer. Price minus cost equals profit. I will use these words consistently in this way to eliminate ambiguity and confusion.)

Shawn’s assertion is a meme that is almost universally accepted in America as a fundamental principle, a given, but it is simply untrue. It is part of the falsely simplistic “Economics 101” nonsense that has been repeated so often that it feels like perfectly sound common sense (see here).

Our acceptance of false arguments like this manipulates us into adopting “free market” solutions that harm our own self-interest and shovels money from poor Americans to rich Corporations.

The reality is that the “free market” does not give a hoot about low costs or even about high quality and there is nothing inherently forcing it to provide the highest possible quality at the lowest possible price. Quite the opposite. Businesses in unregulated free markets will minimize cost (quality) and maximize price to realize the highest possible profit.

If their manufacturing costs are reduced through deregulation, they will not lower their prices to the consumer, they will enjoy higher profits. If they are forced to lower prices through regulation, they will lower their costs (quality) before lowering their profits.

But wait you say. Of course that is true and that is why competition works! If there is competition then if a business wants to survive they must deliver higher quality at lower prices than their competitors. Eventually we reach an optimum for the consumer.

Except that rarely works in the real world, and works least well in providing essential services that really matter, things we must have to live and work and even survive.

The example that is invariably given in idiotic Economics 101 courses is the lemonade stand. If Sally sets up a stand in her yard and charges $1 per cup, but then Billy across the street sees her making money and sets up his own competing stand charging $.95 for the same lemonade, then Sally must either increase her quality or lower her prices or accept less profit if she wishes to stay in business.

But in the real world, Sally and Billy would both quickly understand that getting into a price war is a lose-lose scenario in game theory. If they both just keep their prices the same, they both enjoy higher profits than if they compete. If Jimmy were to open up a stand in his yard and sell lemonade for $.50 at no profit, Sally and Billy would quickly buy him out and return prices to $1. Further, they would both lower the quality of their lemonade, thereby increasing their profits, right up to the point at which they lose sufficient customers to cause a net loss.

In reality, the free market optimizes for the lowest quality at the highest price the market will bear to maximize profits.

When I lived in India, I often had to use a rickshaw to get around. The rickshaw wallahs would see that I was a Westerner and smarmily quote me exorbitant prices for a ride. Now, there were at least 100 wallahs waiting around with nothing to do, all perfectly able to take me. But if I went from one to another they would all give me the same inflated prices. Even if I simply left and walked the 5 miles, none would budge. In that free market, like most, businessmen would rather lose customers than lower their prices. The wallahs all knew as big corporations well know, that I would eventually have to pay their high fees to someone and that benefitted them all much more than undercutting each other.

The last people who should be fooled into believing that competition lowers prices are Walmart customers.  Walmart literally destroys all competition and then, as essentially monopolies in their markets, they provide the lowest prices to their customers. Where is the “free market competition” argument here? Monopolies clearly can do way better. They have huge purchasing power and don’t have to pay advertising overhead.

So it is with essential services like healthcare in America. Free market competition will not force healthcare companies to lower their prices, improve their quality, and sacrifice any of their profits. Competition inherently segregates risk pools which particularly damages this industry. Deregulation will only allow insurers to work together to maximize profits by lowering their costs and raising prices to the highest level the market will bear, which in the case of essential healthcare is cripplingly high.

What we need in healthcare is not deceitful free-market snake oil, but a healthcare monopoly like Walmart. We need public healthcare that can create the largest possible nation-wide risk pool, negotiate the best costs, and take all profit out of the equation. Our free-market system has a vested interest in maximizing profits over patient health. These interests are simply not compatible and never can be (further reading).

 

 

 

On Elegance

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AudreyHepburnFor the generations that frequented movies or browsed magazines back in the 1950’s, Audrey Hepburn became synonymous with elegance. Even for the generations that followed, Audrey Hepburn has remained the iconic symbol of elegance. Ask people for an example of elegance and they are still likely to show you a picture of Audrey Hepburn. When applied to women, she defined elegance as grace and style without ostentatiousness.

MousetrapBut the word elegance can be applied to ideas and designs as well. When applied to things, it suggests something that is both simple and ingenious – ingenious in its simplicity. A mousetrap is a great example of an elegant design. While not pretty to look at, it is nevertheless functionally beautiful. When William C. Hooker patented his spring-loaded mousetrap in 1894, I wonder if he guessed that its elegant design would not be improved upon for at least a century – and maybe never will be. Hooker’s mousetrap has only 5 parts, but it does it’s job as well or better than far more complex and expensive designs. That makes it very elegant indeed.

MousetrapGameTrue elegance, whether in starlets or in devices, is rare. Many people confuse complexity with quality; pretty designs with elegant ones. Inelegance is a very common failing of even the smartest people. In fact the most intelligent people are the most susceptible to producing convoluted, over-complicated solutions to address the simplest problems. But like the mouse-trap game, these clever constructions are fatally flawed in their inelegance.

Elegance separates the talented from the merely smart. Smart people pump out 1000 pages of indecipherably complex manuscript to tell a simple short story. They build contraptions with thousands of moving parts that cannot possibly be maintained. They write computer software that is a brilliant spider’s-web of code that no one but them could possibly comprehend or follow.

The talented author writes a far more powerful tale because it communicates with an economy of perfect words. A gifted engineer achieves the same functionality with an economy of working components that never break down. A master software developer achieves better functionality in a straight-forward, efficient manner that can be easily understood and maintained even by the most junior developers.

An elegant design translated into an elegant solution is often deceptively simple. Many people take this apparent simplicity as indicating a lack of quality or complexity or value, but these impressions in fact demonstrate the strengths of the design.

Mathematicians generally get it. They understand elegance. And they appreciate elegance in equations and theorems and proofs. They have simplification techniques designed specifically to reduce an expression to its simplest, clearest, most elegant form.

Contrary to what many capitalists claim, however, the freemarket does not necessary optimize for elegance. There is this myth that competition results in a sort of Darwinian evolution of products and services into their most elegant form possible. But this does not happen in the real world. In the real world, competition moves toward the most profitable solution that the market will bear. More often than not, the greatest profitability is achieved by ensuring unnecessary complexity to hold the market position and justify high prices. The 5-part mouse trap doesn’t generate very impressive corporate earnings reports.

We can point to things like solid state memory or LED lighting, products that were delayed by the free market because they still made more money on compact disks and incandescent lighting. And those were examples where the market did move, albeit slowly and not entirely willingly. When I worked in research in the 1980’s,  my colleagues were tasked with finding alternatives to ozone-killing CFC coolants. However while there were many cheap, simple, clean alternatives to chlorofluorocarbons readily available, their mission was to find the most expensive, complex alternative possible for which their company exclusively dominated the supply chains.

The free-market does not move us – very far – toward efficiency and elegance. It is focused only on profitability and elegance is not necessarily conducive to profitability. In fact, true elegance, not elegance in appearance only, it is often at odds with the profit-driver of corporations. We need to understand this both as individual consumers and as a planet desperately in need of elegant corporate solutions to the global problems we face.