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Free Markets Are Not Always the Best Medicine

In the case of health care, we know that all the assumptions behind free market optimality are grossly violated.

Steven Levitt, in his new book, Think Like a Freak, with Stephen Dubner, thinks he was being smart by telling British Prime Minister David Cameron that he should scrap the National Health Service and let the magic of the marketplace deal with health care. Strangely, Mr. Cameron wasn’t impressed.

I think there are several things going on here. One is a Levitt-specific, or maybe Freakonomics-specific, effect: the belief that a smart guy can waltz into any subject and that his shoot-from-the-hip assertions are as good as those of the experts. Remember, Mr. Levitt did this on climate in his last book, Super Freakonomics, delivering such brilliant judgments as the assertion that because solar panels are black (which they actually aren’t), they’ll absorb heat and make global warming worse.

So it’s true to form that he would consider it unnecessary to pay attention to the work of lots of health economists, or for that matter the insights of the economist Ken Arrow, and assert: hey, I don’t see any reason not to trust markets here. There’s also the resurgence of faith-based free-market fundamentalism.

I’ll write more on this soon, but I’m seeing on multiple fronts signs of an attempt to wave away everything that happened to the world these past seven years and go back to the notion that the market always knows best. Hey, the solution was always about allocating scarce resources (never mind all those unemployed workers and zero interest rates). And why would anyone ever imagine that market prices are wrong (don’t mention the bubble)?

Underlying all of this is a problem of methodology. How should you use the perfectly competitive model, so beloved of economists? It is, of course, only a model, and we know that its underlying assumptions are untrue. There’s the Milton Friedman dictum that this doesn’t matter as long as the model makes good predictions; that’s actually quite problematic, and there are good reasons to argue that the realism of the assumptions matters too.

But one thing people surely shouldn’t do – one thing that even Friedman would have said, or at least should have said, people shouldn’t do – is cling to the idealized free-market model when it makes lousy predictions.

In the case of health care, we know that all the assumptions behind free market optimality are grossly violated. Maybe, maybe, you could still justify treating health as a normal market if free markets in health care seemed, in practice, to work well. But they don’t! In the United States, our uniquely privatized system is uniquely expensive, while overall indicators of the quality of care don’t point to any American superiority. On the face of it, the evidence strongly suggests that the proposition that health is an area where private markets work badly is borne out by experience.

If one chooses to reject that evidence, if one insists that markets must work just as well for surgery as for shoes, one has to ask: is there anything at all that would make people question free-market fundamentalism? If not, then you’re just selling pure faith.

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