Wednesday, March 08, 2006

Consumer sovereignty, health care, and education 

Not for nothing he's a Nobel laureate: Vernon Smith, the 2002 winner in economics, reduces the problems of rising health care and education costs to a fairly simple abstract:
Here is a bare-bones way to think about this situation: A is the customer, B is the service provider. B informs A what A should buy from B, and a third entity, C, pays for it from a common pool of funds. Stated this way, the problem has no known economic solution because there is no equilibrium. There is no automatic balance between willingness to pay by the consumer and willingness to accept by the producer that constrains and limits the choices of each.
Source, WSJ (subscribers' link.) What happens in the normal market situation? A, the customer, participating in a perfectly competitive market, is not even known to B. All B can see is that he may sell all the product he wants at the going price, and A happens to show up to buy it. Consumer sovereignty reigns as long as they can know what they want:
Consumers are sovereign as long as they know what they want and are able to act upon their desires. If consumers are tricked or fooled into making purchases that do not satisfy their wants and needs due to limited information or deceitful business practices, then consumers might not be the rulers of the economic realm. They might be pawns.
One must wonder how it is that parents could not know how much education to purchase for their children. The choice becomes a choice about curricula, and about price. Smith points out,

If there is a solution to this problem, it will take the form of changing the incentive structure: empowering the consumer by channeling third-party payment allowances through the patients or students who are choosing and consuming the service. Each pays the difference between the price of the service and the insurance or subsidy allowance. Since he who pays the physician or college calls the tune, we have a better chance of disciplining cost and tailoring services to the customer's willingness to pay.

Many will say that neither the patients nor the students are competent to make choices. If that is true today, it is mostly due to the fact that they cannot choose and have no reason to become competent! Service providers are oriented to whoever pays: physicians to the insurance companies and the government; universities to their legislatures. Both should pay more heed to their customers -- which they will if that is where they collect their fees.

But can it ever happen? Will government allow this? Isabel Paterson, in The God of the Machine in 1943, was skeptical:
Where teaching is conducted by private schools, there would be a considerable valuation in different schools; the parents must judget what they want the children taught, by the curriculum offered. Then each must strive for objective truth; and as there is no public authority to control opinion, adults must be supposed to exercise the final judgment on what they learnt in school, after they have graduated. ... But every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later, whether as the divine right of kings or the 'will of the people' in democracy. Once the doctrine has been accepted, it becomes almost superhuman task to break the stranglehold of the political power over the life of the citizen. It had his body, property and mind in the clutches from infancy ... But would not some children remain illiterate? They might, as some do now, as they did in the past.
Not for nothing do universities return to their American Democracy Projects and "democratic citizenship" requirements. Their emphases on "responsible citizenship" are reinforcements of blind obeisance to the state that has been with them almost from birth.

Categories: ,