Wednesday, December 12, 2007

What's the Matter With Markets

Via Mike Huben's ever useful Critiques of Libertarianism Website I stumbled across this post by Mark Thorma which does a great job of explaining the limitations of markets - particularly unregulated ones.

In order for markets to work their magic, there can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and, importantly, property rights must be well-defined (and I probably missed a few). In general, the incentives that the market provides must be consistent with perfect competition, or nearly so in practical applications. When the incentives present in the marketplace are inconsistent with a competitive outcome, there is no reason to expect the private sector to be efficient.

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There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.

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There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better.

I believe in markets as much as anyone. But the expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it, it depends upon the characteristics of the market in question.

It's a good summary - read the whole thing - but I also think it misses the number one argument against laissez faire. This is simply that markets do not guarantee provision. Under a pure market based system the only guarantee of obtaining a certain good is to have the resources to purchase it. This is fine with hamburgers (in New Zealand at present), for example, because (a) they are generally affordable and (b) it's not the end of the world if you can't purchase them. This is not the case with health care on the other hand - treatment is costly and absence of treatment can be, well, deadly. Nor is it the case, in many developing countries (and even New Zealand in a recession), with regards to basic nutritional requirements. Under markets alone - there's no guarantee you can afford to eat and, if you can't, you're dead.

If this strikes you as a bad thing then you are going to want to live under a system governed by more than markets alone.

2 comments:

sagenz said...

so the monopoly health provider that put my wife on a 6 month waiting list to have a scan after 2 years of being fobbed off is a successful provision. She had an operation to remove regionally advanced cancer 10 days later when she got proper care in a different country.

There is a reason that the UK has cancer survival rates 10-15% lower than elsewhere. It is called free state provision.

Terence said...

Hi Sage,

Thanks for your comment.

First, before embarking on debate I want to say that I am sorry to hear of your wife's struggle with cancer and that I hope that she is doing as well as possible at present.

Second, I should also point out that I am no defender of the NZ health system as it is at present. I am currently on a waiting list for ear surgery and on a waiting list to see a cardiologist. In the case of the cardiologist it seems like I may have to wait some time. Which is frustrating as, until I see him/her, I have no certainty as to whether the heart problem I have just been diagnosed with is serious, requiring surgery, or relatively benign.

While we both think NZ's health system could do with improvement the difference is that, I think the problem with the NZ system is that we spend far too little on it. You think we need to privatise or marketise it.

I disagree with you on this because the one developed country that has a privatised system - the US - performs worse on almost all indicators. It's true that the US doesn't do so bad on cancer stats (although nowhere near as well as some boosters claim) but, for the most part, this appears to be because they screen more aggressively. I don't think we need markets to elicit this change in our own system.

As for the UK - I'd be interested to know where your stats come from.

Anyhow, I can think of plenty of reasons why cancer survival rates are lower in the UK than other countries - the first being that compared to most developed countries they spend very little on their health care system. Kindof like New Zealand. And, if your "lower than elsewhere" means "lower than other developed countries" this is hardly a case against state provision as - with the exception of the US - they all have public health systems.

Ok - enough from me - having had my political rant I want to return to my original point: while we disagree about most things you seem like a decent bloke and I'm sure your wife is a wonderful person. And I wish you all the best in overcoming your own personal health care crisis.

Terence