Kenneth Arrow, 1921-2017

The death of economist Kenneth Arrow offers an opportunity for me to revisit a subject of great importance, that I have discussed here before. It is perhaps more urgent than ever as the congress prepares to deprive millions of people of health care. You can read an important paper of his here if you like, from 1963, but I will state the case more accessibly, I hope, and also put it in larger context.

A constant refrain of conservatives is that the Free Market® is the best solution to resource allocation. Interfering in the Free Market® is tantamount to depriving individuals of their freedom. The Free Market® is conceived of as a force of nature, existing independent of society and suffering only damage from political interference.

Of course, this theology is invoked only hypocritically. When capitalists want government to do something for them, they forget about it completely for as long as it is convenient.  The conventional wisdom among economists and moderately sane politicians is that "market failures" do exist, such that intervention is occasionally called for; but these are abnormal and require special justification.

This is all completely bullshit. In the first place, there is no such thing as a Free Market®, never has been, and never can be. Markets are social constructions. In modern, complex societies, they require continuous, pervasive government activity in order to function at all. All markets are structured and regulated, the question is not whether this happens, but on whose behalf?

Let us consider the theoretical conditions necessary for the functioning of a Free Market®, and consider whether medical care can conceivably be allocated through such a mechanism. (Note that the Free Market® always fails, for all good and services, and I can prove it. But it's more obvious in the case of medical services so I'll stick to the knitting for now.)

We'll begin with demand. People have a largely predictable need for typical commodities such as food and clothing, and a desire for some other goods such as entertainment that they will satisfy as their means allow. However, we have no idea what medical services we may need tomorrow or next year, and we rarely desire them at all. The need for medical services is an unpredictable misfortune. Furthermore, it is entirely possible that the cost of what is necessary will entirely exceed our means, while our more fortunate neighbor has negligible medical expenses. The only solution is some form of insurance -- a mechanism for pooling risk.

However, for profit insurance companies have an unavoidable incentive not to accept customers who are at high risk, and to try to avoid paying claims if they can get away with it. So in order for health insurance markets to function at all, they must be regulated.

At the same time, to the extent we have to rely on the monetary contributions individuals are willing and able to make to risk pools voluntarily, medical services will be underfunded and underproduced. There are several reasons for this. One should be obvious: transmissible diseases threaten everyone. Disease prevention and treatment benefits everyone beyond the cost for the individual. Furthermore, sick people can't work or take care of dependents to the extent healthy people can, if at all, and having sick friends and relatives, or even seeing strangers suffer, makes at least some of us sad.

Furthermore, as consumers, we are not only involuntary but incompetent. We depend on physicians' expertise to decide what to purchase, or to have purchased on our behalf by our insurer. While the current fashion is to involve patients in decision making, our capacity for that involvement is limited. We still need providers to explain our options accurately, in a way that we can understand and is relevant to us. But they're making more money by some choices than by others. So it matters how these incentives are structured.

There is a good deal more I could say about this, but the unavoidable conclusion is that we need a universal risk pool, regulated medical practice with some constraints on spending, and that people pay no more than they can afford to participate. Universal, comprehensive, single payer national health care accomplishes this. And it makes us all more free.