Map of life expectancy at birth from Global Education Project.

Friday, March 03, 2023

Economics 101

I believe I have addressed this subject in the past, but this is a good time to revisit. Chapter two is about the economics of health care, so I need to begin by discussing how economics is usually understood and discussed in the U.S. Unfortunately, introductory economics is not taught as an empirical subject -- presenting to students what we know about reality -- but as something more akin to theology. Economists like to make what they call "simplifying" assumptions. They imagine cartoon worlds in which there are only two people, or two industries, or two corporations competing within the same industry. Then they tell students that whatever appears likely to happen in those cartoon realities can meaningfully be applied to a world in which there are millions of people and thousands of industries and corporations.In making this leap of faith, they also make several other assumptions. 


Some of the most important of these are:


  • No "externalities":All of the costs and benefits of a transaction affect only the parties. 
  • Perfect competition: No firm or group of firms has the ability to influence prices or output in the market. 
  • No "public" goods: Goods that are "non-excludable" and "non-rivalrous." This means that once they are provided, it is difficult to exclude anyone from using them, and one person's use does not diminish the availability of the good for others. Examples include national defense and public parks. And oh yeah, infectious disease control. 
  • Perfect information: Information asymmetry occurs when one party in a transaction has more information than the other party. This is basically true 100% of the time when people get health care.

Economists can show that when all of these assumptions (and a couple more) pertain, then the market will produce what is called a "Pareto optimum" distribution of resources. That means that nobody's share an be increased without reducing someone else's. So this must be the best of all possible worlds, right? Well actually a Pareto optimum world can be one in which 1 person has 90% of the wealth and the remaining million people have 10%, or any other distribution you can imagine. And there is absolutely no reason to conclude or even suspect that the resulting distribution is just, or defensible, or that we couldn't move to a different Pareto optimum that is less unequal by taxing the rich.

 

Furthermore, it may already have occurred to you that none of the assumptions are true, ever. These are not occasional or unusual or exceptional "market failures" that might require some special treatment. They are universal, pervasive, inescapable facts of life. But politicians, their wealthy donors, and academic economists all argue as though the assumptions are generally true and the Pareto optimum must be an ideal world. And journalists generally believe this as well, because it's "Economics 101." Yes it is, but it isn't true. More to come.




1 comment:

Don Quixote said...

Sed expecto pessimus.