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“The free market can do it!” Redux October 14, 2007

Posted by Jim Satterfield in Business & Society, Economics, Health Care, Health Insurance.
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David Broder writes about a plan to fix our health care problems with a “publicly subsidized individual health insurance”. Of course this concept is somewhat useless. OK, it’s lots of “thought” about a proposal that will do nothing to help improve our system. Why won’t it? The key lies in this paragraph.

Instead, the report calls on government to restructure the private insurance market in less rigid form than Hillary Clinton proposed 14 years ago — and then step back and let competitive market forces do their invaluable work of forcing recalcitrant insurers, doctors and hospitals to bid against each other on the basis of price and quality.

Competitive market forces do not simply function magically in a vacuum. The primary concept behind the ability of the market to accomplish what these people expect it to is the rational choice theory, which is also used in other social sciences. Rational choice in turn relies on a rational actor. The assumption of the existence of a rational actor is one where the people taking part in the economy are willing and able to make a choice based purely on their knowledge of their needs, the product being purchased and their ability to pay for it. It does not account for irrational fears, emotions or choices based on incomplete information or lack of understanding. The plain truth is that the vast majority of the American populace does not have any information base for making these choices and the plans that hope to use the magic of the free markets do not address that fact. There are economists and social scientists addressing the limitations of this part of neoclassical economic theory, as shown by this article in Harvard Magazine but apparently those who are proposing that the market will solve the problems in the American health care system don’t acknowledge them. They also don’t acknowledge the desire of those in the health care industry to distort rational choice with advertising, small print, legalese and the ability to in effect change the terms of any agreement unilaterally much as their compatriots in other industries do. Look at this article from SmartMoney and realize that those who propose that the current system, largely unchanged, is what we need to stick with believe it is perfectly acceptable that consumers go through this routine. I disagree.

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