Krugman, Bastiat, and Freedom to Choose

Don Boudreaux has an interesting comparison of Paul Krugman’s thinking with that of Frederic Bastiat’s when it comes to competition, freedom and the ability to make one’s own decisions.

Boudreaux quotes Krugman,

is giving individuals responsibility for their own health spending really the answer to rising costs? No.

….it’s neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment. A well-known experiment with alternative health insurance schemes, carried out by the RAND Corporation, found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending.

As well as quoting Bastiat,

After all, what is competition? Is it something that exists and has a life of its own, like cholera? No. Competition is merely the absence of oppression. In things that concern me, I want to make my own choice, and I do not want another to make it for me without regard for my wishes; that is all. And if someone proposes to substitute his judgment for mine in matters that concern me, I shall demand to substitute my judgment for his in matters that concern him. What guarantee is there that this will make things go any better? It is evident that competition is freedom. To destroy freedom of action is to destroy the possibility, and consequently the power, of choosing, of judging, of comparing; it amounts to destroying reason, to destroying thought, to destroying man himself. Whatever their starting point, this is the ultimate conclusion our modern reformers always reach; for the sake of improving society they begin by destroying the individual, on the pretext that all evils come from him, as if all good things did not likewise come from him [emphasis added].

While the part the Boudreaux highlights is indeed relevant I also liked the part about how destroying freedom of action (one’s ability to choose) also destroys judging, comparing, reason, though and ultimately man himself.

Moreover, I’m not very thrilled with Krugman’s view of how things have to work. After all, I’ve already documented how his approach can result in people not getting medical procedures that they can and are willing to pay for out of pocket.
Krugman is right that medical care is complex and that many people could have a very hard time determining what is the best course of action. However, one thing the government could do is help reduce this problem by making information available cheaply or even with a price of zero (e.g. the Consumer Price Index which can be downloaded for “free”). Also, people could and perhaps should get second opinions on treatments, procedures as well as medication. Krugman is, when you get right down to it, is advocating that people be kept ignorant of medical issues and rely simply on the government for the answers. Basically, “Hello, I’m from the government and I’m here to help you.”

And for those of you who think Krugman recall this story about the young man who wanted to fight his Hodgkin’s disease with an alternative treatment, but was stopped by the government. While I think that the young man in that story made the wrong decision in terms of treatment I’m not ready to coerce him into what I think is the right therapy…Krugman however would seem quite happy with that decision.

As for the observation that when people pay more of the cost out of their own pocket induces them to cut back on both unnecessary and necessary treatments, well derrr. That is what any economist would likely predict. Further, it isn’t clear that this is a “bad thing” in that people are deciding on how best to spend their money. That I or Krugman would spend their money differently doesn’t mean that they made the wrong choice, merely a different one. Krugman is definitely guilty of Hayek’s notion of Fatal Conceit.

FILED UNDER: Economics and Business, Health, ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. M1EK says:

    “As for the observation that when people pay more of the cost out of their own pocket induces them to cut back on both unnecessary and necessary treatments, well derrr.”

    No, not “well derrr.”. Most of the time when HSA/high-deductible plans are touted here and elsewhere, it’s because it supposedly removes the incentive for UNNECESSARY treatment while still preserving the incentive for “oil change stuff” (the old car analogy – which is full of crap, but so many folks buy into it).

    Most people with jobs get slightly below the medical care they probably should – just because it’s such a pain in the ass to go to the doctor. Until we’re willing to ration care for the elderly, no nickels-and-dimes crap like this is going to remotely work.

  2. Since we have seen that national health care systems will ration care based on budget concerns, who would you rather make the decision at to whether you get the care, you or a bureaucrat?

    I agree with Steve that the answer to people selecting the care they need is not having someone else make the decision, but in providing more information. One of the fundamental assumptions on capitalism is the quality and availability of information. An extreme example would be if I see two filling stations, side by side, with a $0.10 difference in price. You would likely go to the cheaper one (absent other factors like longer lines, ease of entry/exit, the money was going to support Chavez). But what if I told you that the cheaper one added 5% water to their gas as part of how they make it cheaper. Gee, the information beyond the price sure does have an impact on the decision. Likewise, if a procedure really is necessary, then provide the information on why it is needed, what the alternatives are, costs, likely costs of not treating it, etc. I suspect that at the end of the day, a better informed individual will make more of the ‘correct’ decisions than the bureaucracy. Yes there will the the cancer patient who will elect to treat the cancer by sitting in a pyramid with dog poop on his head. But I suspect there will be less of that than bureaucrats screwing up because of indifference.

    I would also want to see a lot more information on “needed” vs “not needed”. There is a lot of documentation on tests run to provide cover for a potential law suit. Is this part of the “needed” vs “not needed”. My wife recently got a splinter stuck up under her finger nail. Their first recommendation was to cut the finger nail to the quick, then remove the splinter (it was a pretty nasty splinter and way under the nail). She said “Hold on, can’t you just pull it out?”. They pointed out that pulling it out would likely remove more soft tissue (though save the nail) and they might not get it all. She opted to have them pull it out. They squirted some antiseptic under the nail (big ouch, astringent solution fired through a needle) after visually inspecting to be sure they got it all. In her balancing, she figured the ‘meat’ would grow back sooner than the nail and would be a lot less trouble over all. Now did she opt out of the necessary procedure for an alternative?

    Another example is where I get my eyes checked. They have an additional procedure that they claim can help detect eye problems earlier, but that it is not approved for routine exams by the health insurance companies. The eye examiners recommendation is that you spend the extra bucks out of your own pocket, but just make a note on your chart if you opt not to. Is it needed? Depends on if they find something. Lets say it isn’t needed, then consumers are making their own choices with their own dollars. Lets say it is needed, but the insurance companies, driven by their cost models, don’t want to pay for it. What would keep the government from making the same sort of decision. What is more likely the case is that some people are more likely to need it and others less likely to need it. So the health companies look at the actuarial tables, determine those likely to need it, the costs of adding it into the routine for every one, the costs of treating problems found later than this test would have found them, etc. Out pops a go-no go decision on adding this to their routine care. If they are smart and know that a certain number of people are likely to pay for it out of their own pocket, they can add that into the equation. Maybe the people who need it most (e.g. older) would also be more likely to pay for it out of their own pocket. Now the costs to cover those who should have got the test, have a problem and have higher bills goes down with out a cost to the insurance company. But the one size fits all says don’t let consumers make those trade offs, just impose it by either including it for everyone (higher costs) or for no one (gee, sorry you got the black ball and lost your eyesight).

    Another way of looking at this is that the NYT makes the wrong decision on what should and shouldn’t be in the paper. Just look at their correction columns where they add or remove information. Would he advocate setting up a government office that would be tasked with making the ‘right’ decision on what goes into the paper? It’s the same principle. If the only solution you can see to people in a free market making the ‘wrong decision’ is putting a government bureaucrat in the loop, then lets open up the ‘office of filtering the NYT’ right now.

  3. A nice quotation that helps capture the problem with freedom that so many on the Left would prefer to replace with their managed utopias. No thanks.

  4. legion says:

    Since we have seen that national health care systems will ration care based on budget concerns, who would you rather make the decision at to whether you get the care, you or a bureaucrat?

    Neither of those options is acceptable. the decision should be made by (or at least be heavily advised by) someone with a moral and professional responsibility for the well-being of the patient. Like, say, a _doctor_. Why does _that_ option never seem to pop up in these discussions?

  5. carla says:

    Why are healthcare costs high?
    Is it because buyer doesn’t know anything about their problems or because fraud insurance is high.
    Is malpractice high because lawsuits are prevalent?
    Are lawsuits prevalent because drs. take the easy percentage points and end up with the numerous dr visits? How are they supposed to make up for their lack of funds from insurance coverage.
    Probably more tests and kickbacks from drug manufacture… pushing the Rx. I don’t know…
    But supposing that adding more money in taxes and programs would fix it, just once again ignores the real problems. Money isn’t the problem. Ignorance in the buyer is not the problem.
    No other profession is the public so vulnerable to yet maybe the least studied about themselves.
    Buyer beware and ethical practice both are necessary. And, I heard once that hospitals employ
    licensed doctors and boards promote and demote just such doctors. Got a dr. complaint call their hospital affiliation board.

  6. Legion,

    Are you advocating that doctors should decide what treatments are needed, regardless of cost? Can you not imagine there might be a wee conflict of interest here. Are you also going to ignore the positions of the payer and patient (assuming they aren’t the same person)?

    Think back to the example I gave of my wife, splinter and nail. If just the doctor was to make the decision, then the nail would have been split wide open. Given that the outcome was favorable without the split, then perhaps you can see how what the doctor thinks best may not include all the other considerations involved. Some doctors may decide to act to minimize the chances of a law suit, others to act on what will make them the most money, others on what is the easiest for them, others on what would be the most ‘interesting’ way to solve the problem.

    I would argue that the person best suited to make the choice is a well informed patient who is spending their own money (at least to some reasonable degree). I have known doctors who have “fired” their patients, so the doctor will still have an input. In fact, most patients are likely to defer to the doctor, but the check and balance of considering other options is one I like leaving in the hands of the patient.

  7. legion says:

    YAJ,
    Are you advocating that doctors should decide what treatments are needed, regardless of cost? Can you not imagine there might be a wee conflict of interest here.
    There is conflict, but only if you allow a direct linkage between cost of procedure and doctor salary. Note that ‘procedure cost’ != ‘difficulty’ or ‘chance of favorable outcome’.

    Although I agree that the patient should have the final decision, and there should be some representation of the interest of the payer (assuming it’s not also the patient).

    Hey, this is starting to smell like a system we’re developing here…

  8. Ray says:

    Under our current health care system, especially when patents pay for their health care directly, doctors do not make decisions of what medical care is appropriate for a patents, unless that patent is unconscious and unable to make that decision on their own. Doctors recommend treatment to their patents and the patents decide on whether to use the recommend treatment or not. A patent also has the ability of asking several doctors which treatment is available and can, if desired, pick a treatment that is medically effective and also cost effective.

    Under a national health care system, as it is promoted by most, that decision by the patent would be removed. That is guaranteed to raise the cost of health care and not lower it as some suggest. Without competition, any incentive to lower cost will disappear and the cost for medical care will rise dramatically

  9. Ray says:

    opps patents should be patients, lol. I must preview my comments better before posting!

  10. jpe says:

    One of the fundamental assumptions on capitalism is the quality and availability of information.

    Another is that consumers are rational actors; Krugman pretty effectively torpedos that bald assumption. Contra Verdon, people will cut back on necessary care even when that care will save money down the road. The reason for that stems from people’s irrational tendency to overvalue the present at the expense of the future.

  11. Tano says:

    “As for the observation that when people pay more of the cost out of their own pocket induces them to cut back on both unnecessary and necessary treatments,…it isn’t clear that this is a “bad thing””

    Well there ya have it. Thanks for your honesty Steve. Usually takes a lot of teeth-pulling in order to get you guys to fess up to this.

    This is a good reason why so many people feel, in their bones, that this type of economic hyper-libertarianism is thoroughly amoral and revolting.

  12. Perhaps a bit tangential, but I make all my freshmen students read Bastiat’s “The Law.” Juxtaposing him against Krugman is entirely appropriate in this context, but I have to wonder if it diminishes Bastiat — his works are indeed “great books,” while Krugman has shown himself to be (very) little more than a partisan hack.

  13. Steve Verdon says:

    Another is that consumers are rational actors; Krugman pretty effectively torpedos that bald assumption. Contra Verdon, people will cut back on necessary care even when that care will save money down the road.

    This is not necessarily irrational since current expenditures are “worth more” than future expenditures. Discounting and all that you know.

    Well there ya have it. Thanks for your honesty Steve. Usually takes a lot of teeth-pulling in order to get you guys to fess up to this.

    This is a good reason why so many people feel, in their bones, that this type of economic hyper-libertarianism is thoroughly amoral and revolting.

    I think that your paternalism and arrogance are immoral and highly revolting. So, as far as I can see, that puts me up one on you.

    Perhaps a bit tangential, but I make all my freshmen students read Bastiat’s “The Law.” Juxtaposing him against Krugman is entirely appropriate in this context, but I have to wonder if it diminishes Bastiat — his works are indeed “great books,” while Krugman has shown himself to be (very) little more than a partisan hack.

    Good point.

  14. […] Krugman, Bastiat, and Freedom to ChooseOutside Beltway – A well-known experiment with alternative health insurance schemes, carried out by the RAND Corporation, found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending. […]