Are Medical Markets an Inherent Failure?

(Editor's note: The following has been republished with permission from the Foundation for Economic Education’s “Not So Fast!”). It was first printed on August 5, 2009.

By William Anderson

Nobel Prize-winning economist Paul Krugman recently made an extraordinary statement regarding the application of markets to medical care. Writing in his July 31 column, Krugman stated:

Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist, attacking the free market. But unregulated markets don’t work for health care — never have, never will. To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage. (Emphasis mine)

Now, I hardly would be surprised to read such a comment from a politician or political science professor, but when a supposedly-august economist makes this claim, I believe the statement needs to be further analyzed before we can utter the phrase, “Not so fast.”

In doing this, however, we have to define our terms. First, we have to define what an “unregulated market” is, and second, we then have to define the term “work” as he applies it.

Now, when Krugman refers to an “unregulated market,” he is describing a “market” in which the government does not set the terms of exchange, the prices, and govern the output. In his view (expressed elsewhere) an “unregulated” market is chaotic, full of gaps, and generally operates out of control. For example, he has described the turmoil on Wall Street as being the result of “unregulated markets” in finance.

I don’t know what academic world Krugman inhabits, but I would say that there is no such thing as an “unregulated” market. Even a market in which government plays no role absolutely is going to be regulated by the Law of Scarcity and by profits and losses. Indeed, markets exist precisely because of scarcity; non-scarce goods (like the air I am breathing right now) do not have to be allocated because my use does not deprive anyone else of using this good. I give up nothing to breathe this air, and neither does anyone else in my house.

If a good is scarce, however, it not only must be produced, but also distributed, and markets are those entities that govern the process of production and exchange. The only goods that can avoid some kind of market process are precisely those that are non-scarce, and no one, not even Krugman, is claiming that medical care is a perfectly free and abundant good.

However, that clearly is not true. Krugman is saying that the medical markets cannot function unless government is directing the production and exchange. What he means is that the medical market is different than the market for, say, cars or CDs. From what I can decipher from his and other claims to support “universal” medical care, a “market failure” occurs when someone is not able to access immediately all of the medical care he or she “needs” immediately.

Now, if this is what he means by a “market failure,” then every market (including the distribution of government-produced goods) falls into that category. If I cannot afford a Rolls-Royce, is that due to “market failure”? Lest one think I am exaggerating, read on:

…government involvement is the only reason our system works at all.

The key thing you need to know about health care is that it depends crucially on insurance.

This is a non sequitur. There is nothing inherent about medical care that requires insurance or any other third-party payment for ordinary treatment. In fact, health insurance first came about as a mechanism to deal with paying for catastrophic events, not routine care. Government involvement in medical care, and especially the advent of Medicare with its third-party payments for nearly all medical care hastened the invasion of the modern mess.

From an economic point of view, a scarce good is a scarce good, whether it is medical care or sirloin steak. The problem is that government has piled intervention on top of intervention, and driving up the costs and making care less available in the process. The “failure” of the present system is a government failure, period.

William Anderson is an associate professor of economics at Frostburg State University. He received a doctorate in economics from Auburn University, and is an adjunct scholar with the Mises Institute and the Mackinac Center. He has written for The Freeman since 1981, and also has had articles in Reason Magazine, Forbes On-line, The Free Market, and a number of refereed journals. He is on the editorial board of The American Journal of Economics and Sociology, the Journal of International Business Disciplines, and the Journal of Economic, Social, and Political Studies.

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