Friday, February 14, 2014

Free Market Mythology | How Libertarian Ideology Undermines Democracy Part II: Why the Free Market Does Not Efficiently or Effectively Allocate Health Care Goods and Services

Continued from: 

Contemporary neoliberal and libertarian political and economic arguments concerning health care are a return to the principles of market fundamentalism, which are rooted in the flawed assumptions of neoclassical economics. Market fundamentalism poses a number of problems to healthcare. I will explain why health care as a commodity does not meet the conditions of market exchange in which supply and demand react to price signals to produce equilibrium. I will also explore some consequences of relying on market mechanism to distribute health care.  

Note: I will conflate neoliberalism and libertarianism in this blog post. It is helpful to think of the two on a spectrum - libertarians are at the most extreme end of market fundamentalism.     

A Brief Genealogy of Market Fundamentalism

From classical liberalism and classical economics to neoclassical economics and onto neoliberalism (libertarianism), the assumption that the free-market - unhindered from political intervention or regulation – provides the best possibilities for individual liberty and equality. Because the market has been theorized as a place where autonomous actors interact anonymously and which equalizes power sources while each person interacts on price considerations alone, any move to regulate the market has been viewed as an attack on freedom. What I am most concerned with here is the contemporary condition in which neoliberal reforms have increased inequality while rhetorically appealing to the freedom ensured by the free market. The neoliberal movement has sought to increasingly disembedd the economy from political institutions which according to many, such as David Harvey, Joseph Stiglitz, Michael Mann, Margaret Somers, Jim Aune, and Saskia Sassen, among others, has led to a weakening of democracy and democratic citizenship. For Harvey, neoliberalism reduces freedom to advocacy of free enterprise: 

“The neoliberal debasement of the concept of freedom ‘into a mere advocacy of free enterprise’ can only mean, as Karl Polanyi points out, ‘the fullness of freedom of those whose income, leisure and security need no enhancing, and a mere pittance of liberty for those people, who may in vain attempt to make use of their democratic rights to gain shelter from the power of the owners of property.’” Harvery 2005, 183

It is this rhetorical device that Harvey, Stiglitz, and Mann see as a tool for redistribution of wealth to the wealthy and what Somers fears has reduced citizenship to a contract. Somers is not referring to the “social contract” of Hobbes, Locke, and Rousseau, rather she is referring to a distortion of “the meaning of citizenship from that of shared fate among equals to that of contractual privilege.” (Somers 2008, 3) This “contractualization of citizenship,” which is an effort to “reorganize the relationship between the state and the citizenry, from noncontractual rights and obligations to the principles and practices of quid pro quo market exchange,” (Somers 2008, 2) distorts the meaning of citizenship and “makes social inclusion and moral worth no longer inherent rights but rather earned privileges that are wholly conditional upon the ability to exchange something of equal value.” (Somers 2008, 3) This ties into Sunstein’s argument that “markets will not stop discrimination” when we consider Harvey’s explanation about how the religious right aligned itself with neoliberal market fundamentalism which in many way can be read as a way for white’s to resist competitive pressures for employment with blacks. “The construction of consent” achieved in the 1980s played upon the worldview filters of whites in which they “tend to notice events that are consistent with previously-held stereotypes and to disregard events that are inconsistent with them.” (Sunstein 1991, 29)

The rhetoric of market fundamentalism harkens back to the neoclassical assumptions in that it insists the only way to create the best society is to allow the market to be completely disembedded from political regulations and the unionization of workers. If the free market is ontologically natural then the only way for individuals to be free is to allow the market to be free so that it can move towards equilibrium and efficiently allocate scarce resources. Or as Somers states, market fundamentalism is “the drive to subject all of social life and the public sphere to market mechanisms.” (Somers 2008, 2) The neoliberal rhetoric of the market invokes “an image of a system by which noncompulsive individual rationality is mystically coordinated (the ‘invisible hand’) to produce both freedom and efficiency, and all without any need for political power or government coercion.” (Somers 2008, 74) 

Thus, when Margaret Thatcher asserted that there was no such thing as society, she was appealing to the idea of the autonomous rational actor operating anonymously in the market. For neoliberals “all forms of social solidarity were to be dissolved in favor of individuals, private property, personal responsibility, and family values.” (Harvey 2005, 23) It is this reduction of social exclusion, inequality, and institutional racism to a singular cause of personal responsibility that provided the rhetorical justification to blame minorities, primarily blacks, for their inequality and to contractualize their rights. Sunstein’s thesis comes back into play here. If consent is constructed around the personal responsibility thesis then individual  in poverty can be blamed for the inequality of the economy. Dismantling the social safety net further institutionalizes systematic discrimination by covering it over with the rhetoric of personal responsibility – the disembedded market in this case works to further discrimination. Now any attempt by the government to correct the failures of the market that create and continue systems of inequality are considered to be the cause of increased inequality.

Neoclassical Economics and the Foundation of the "Free Market"

The neoclassical conception of the market is based on a micro-economic “spot market” model in which one time transactions occur among multiple, rational, relatively autonomous, self-interest seeking, and utility maximizing, buyers and sellers interact – none of which have enough power to unilaterally influence the price[1]. These spot markets arise spontaneously as the natural tendency of man to, as Adam Smith contended, “truck and barter.”[2] Each spot market is self-regulating as rational individuals, seeking to maximize their utility value while buying and selling goods under the condition of scarcity[3], respond to the price mechanism. The price mechanism enables the market to allocate goods most efficiently and effectively, tending towards a state of equilibrium - a state in the market when supply and demand have achieved its best balance and individuals have no incentive to change their behavior[4]. Each spot market is theorized to aggregate into a macro-level economy, as an interlocking system of markets automatically adjusting by price mechanism[5]. Because man is naturally rational and utility maximizing and because markets are “self-regulating and self-correcting smoothly functioning machine governed by objective laws and universal principles”[6], the aggregative level of self-regulating markets sets the condition in which individuals and society can actualize the highest level of productivity and allocation of goods, and equality. Therefore, the free market system is the only legitimate way to organize a free society characterized by universality, equality under law, freedom of contract, and voluntarism[7] - the only natural organization of society that ensure that “all boats will rise.” Thus, economists posit that any interference (such as government regulation, labor unionization, minimum wage, welfare, etc) in the self-regulating price mechanism of the market will result in market inefficiencies keeping markets from reaching equilibrium and therefore restricting the freedom of individual actors from maximizing their utility value. However, this system of interlocking spot markets requires a restrictive set of assumptions[8] that enable economists to construct “clean models” to explain and predict human behavior that lead “them to ignore the empirical world around them.”[9]

Many economic sociologists and economists have challenged the assumption that spot markets aggregate to a macro economy, arguing that they simplify complexity of human behavior[10], clean models privilege rigor over their relevance[11] and are situation specific[12], markets are dynamic and always changing – preventing equilibrium[13], loaded with political bias[14], and that markets have always been embedded in social, cultural, and political institutions[15]. The foundation of these macro economic critiques are the micro level critiques of the seven neoclassical assumptions.

Does Health Care meet the Requirements of a Spot Market?

The answer is no.

A core assumption of neoclassical economics is that individuals are rational, autonomous, and self-interested, only seeking to maximize utility under conditions of scarcity. As autonomous actors compete in the market, consumers compare and purchase goods anonymously in a one time spot market. Economic decisions, based on price alone, push the market to equilibrium where supply equals demand. In some circumstances, the market may be the most optimal way to structure commodity exchange. However, this does not preclude that the market is the most optimal medium to distribute health care services or that health care can be understood as commodity to be exchanged in the market. In order to determine whether the market is the best way to distribute health care we must first ask whether an individual seeking to consume health care is rational, autonomous, and utility maximizing. 

In order for the free market to function efficiently it must be a spot market in which rational individuals make decisions based on price alone. For this spot market to work, each party involved in a transaction must have perfect information concerning alternatives, quality, and price. Individuals involved in market exchange must be anonymous, meaning that they have no previous relationship or knowledge of each other that would influence his or her decision. This also implies that purchases are made in that moment according to price and not based on any historical experience or knowledge of the product or other person in the relationship. Further, there must be no institutional barriers or influences that prevent an individual from making a decision based solely on price. Any interference in the price mechanism will disrupt the equilibriating process that ensures efficient allocation of goods and services.

First, an individual is not always rational when consuming health care services and products. Factors such as trust, fear, and incomplete information and options lead consumers to act in ways that are not purely rational. 

Rational action, in the economic sense, is action determined solely by price and perfect information about possible options. However, individuals do not make decisions based only on price and lack perfect information about alternatives. For instance, when faced with important health concerns, instead of choosing a doctor based on price, an individual may trust a recommendation from a trusted friend of family member.  In this case, price is not the primary determinate in her choice and she does not act autonomously. She may also choose to continue consuming health care from her family doctor whom she trusts because of the history her family has with that doctor – even if that doctor is not the most qualified for the service needed or the lowest price option. 

These decisions reflect the importance of trust and relationships over price and therefore cannot be considered rational utility maximization – which may even be detrimental to their health. For example, John may continue to visit his family pediatrician at the age of 30 even though the pediatrician is not the best equipped to diagnose and treat the issues common to a 30 year old male. 

Fear may also prevent a patient from visiting a doctor, regardless of how much or how little the visit may cost. John may choose to not visit any doctor because of fear that the diagnoses of his chest pain may be a heart condition that he is psychologically not ready to deal with. If he were thinking rationally, he would consult his doctor recognizing that if the condition were treated early it would improve his health and would cost less in the long run. John’s decision to not choose to consult his physician is not rational action nor is it self-interested utility maximization because he is risking health and there may be no price point that could convince him to visit the doctor. 

In life or death situations, the individual may not even have the option to consider price or evaluate alternative services or providers. A heart attach, a life threatening car accident, and going into labor prematurely are incidents in which the patient may not have an opportunity consider alternatives. In order for a spot market to operate efficiently, individuals must rationally calculate ends and means according to price. This enables the market to allocate resources according to supply and demand. In the case of health care, individual action is influenced by a number of variables, including trust, fear, relationships, and lack of information and options.  

Second, the spot market model assumes that institutions do not affect economic decision. However, the health insurance industry, a major institution in health care, places restrictions on available options for doctors, treatments, and medicines. The health insurance does not only restrict option, as an institution, it also prevents entry of consumer into the market for health care. Because health insurance is required for routine doctor visits and preventative health care, individuals that cannot afford insurance are excluded from participation in the market. Constructed as a market itself, the health insurance industry erects barriers to rational utility maximizing decisions based on price.

Third, asymmetry of information between doctor and patient is another factor that prevents the price mechanism from operating efficiently. There is a high level of inequality of information between a doctor and a patient. The patient lacks the relevant information to make an informed and rational decision. If the doctor tells Jessica that an x-ray is necessary to determine the cause of her chest pain, she lacks the information to assess the necessity of the x-ray. Also, she is already at the hospital and worried about her chest pain, therefore she cannot shop for other opinions. If the x-ray is in fact necessary, price is not a consideration and alternative price options are not available. She must rely on the assymetrical knowledge of the doctor. The service is offered at a fixed price and therefore is not set by supply and demand that prevents the service from being allocated efficiently according to the price mechanism. When threatened with life or death, Jessica will more than likely prefer life regardless of the price or alternative options offered at other hospitals. These are only a few example, but they illustrate why health care is not commodity that can be exchanged in a free market. The individual in the market for health care does not make decisions based on a rational price analysis and does not act autonomously or anonymously. Further, an asymmetry of information inhibits rational action and institutions interfere in rational utility maximization.

The Individual, Social, and Economic Consequences of Reducing Health Care to the Ideology of Market Fundamentalism

Over-reliance on market mechanisms in health care ignores the human and societal dimensions of the need for health care. Organizing health care according to the free market model, presents obstacles to optimal distribution of health care instead of solutions. Health is not a commodity that can be rationally decided upon. If an individual does not have access to health care (preventative or emergency), she lacks the ability to live a productive and happy life. Likewise, individuals do not make decisions about consuming health care rationally. Psychological, institutional, and information barriers restrict an individual from receiving the basic necessities of good health and poor health restricts the pursuit of “life, liberty, and happiness.” The consequences of over-relying on market mechanisms are more severe than the prevention of market equilibrium. The basic values of society are at stake: human dignity, life, death, and quality of life. 

Consumers seeking the goods and services of health care cannot be reduced to economic units. They cannot be understood as rational utility maximizers when suffering from a heart attack or giving birth to a child. They have only one option and that is to choose life. By reducing health care to market mechanisms, not only do we erect barriers to preventative health care but we also burden individuals, that lack alternatives, with debt from their preference of choosing life.

The inadequate distribution of health care has economic consequences for society as a whole. 

First, a society based on free market production and exchange of goods and services relies on the productivity of individuals. Healthy individuals are more productive on the job and are able to make more rational decisions in the market. Unhealthy individuals are constantly affected by health issues and less productive at work and less rational in decision making. 

Second, the inadequate distribution of preventative health care has long-term effects on the cost of health care and the efficient operation of hospitals. If an individual has access to basic preventative health care, he is less likely to develop illnesses and diseases that, when left untreated, result in expensive ambulance trips and emergency room procedures.

Deconstructing the common sense beliefs about political economy,

[1] Block 1990

[2] “Human beings are by nature economic animals who, according to Adam Smith, have an inherent propensity to ‘truck, barter and exchange.’” Gilpin 2001, 54, 55

[3] “Society, like nature, is fundamentally constrained by the scarcity postulate – the constitutive and inevitable reality of chronic material scarcity – and the self-interested individual who responds primarily to material incentives.” Somers 2008, 75

“It is the incentive to overcome scarcity or to act or some other self-regarding interest that motivates the boundless transactions that constitute the self-regulating market.” Somers 2008, 75

[4] “… an equilibrium means that no economic actor has an incentive to change his or her behavior and the costs and benefits of the existing situation are judged to have achieved the best balance that an individual could reasonably expect. Therefore, the potential gains from changing the situation are not worth the potential costs, so no change takes place.” Gilpin 2001, 55

“Neoclassical economics assumes that markets, at least over the long term, tend toward an equilibrium in which supply matches demand. When a disequilibrium exists, powerful forces will bring the system back into equilibrium.” Gilpin 2001, 55

[5] “Entire tradition of modern economic thought rest on concept of ‘the economy as an interlocking system of markets that automatically adjusts supply and demand through the price mechanism.’” Block in Polanyi 2001, xxiii

[6] Gilpin 2001

[7] Somers 2008

[8] “Most contemporary economists are somewhat more relaxed about these issues, however, because for them the model of market self-regulation is a kind of platonic ideal that can never be realized in reality. Recent efforts to work out the mathematics of general equilibrium have made clear that it is possible to construct an economic model in which the price mechanism will actually produce a general equilibrium only by making a number of highly restrictive assumptions. In short, it is difficult to imagine that market self-regulation works in reality as it does in theory. Moreover, contemporary economists are well aware of the need for government action to produce public goods that are vitally necessary for the private economy. Nevertheless, the ideal of market self-regulation still has a powerful hold on the imagination of economists.” Block 1990, 48

[9] “Economists' modeling of human behavior, deduced from that core assumption about human nature, is elegant, thoroughly consistent, and recently and increasingly claims universal applicability. But, despite the stability and power of economists' core assumptions and the logical consistency they allow, there is a fatal flaw for sociologists in their deductive modeling: it leads them to ignore the empirical world around them.” Hirsch, Michaels, and Friedman 1987, 319

[10] “Although some economic theorists such as Adam Smith, Karl Marx, and Joseph Schumpeter have attempted to comprehend the economy as a complete, dynamic, and ever-changing system of human interaction, economics in the early twenty-first century is essentially a toolbox of formal models and analytic techniques.” Giplin 2001, 49

“The point of this argument is to show that actual economies represent an extremely complex mix of microeconomic choices, social regulation, and state action.” Block 1990, 73

[11] “In the inevitable trade-off between rigor and relevance, economists will choose the former over the latter almost every time. One of the highest compliments that one economist can give another is to describe his or her work as "robust," regardless of its utility in furthering understanding of the actual working of the economic system.” Gilpin 2001, 49

[12] “The utility of a model is situation-specific, and as situations are seldom identical, it can be difficult to know which model is in fact applicable and whether the model can actually predict or explain the outcome of a particular situation.” Gilpin 2001, 50

[13] “The pressures of market competition and the imperative to achieve ever greater efficiency lead to the continuous innovation of new technologies, organizational forms, and productive techniques, and to discarding of the old in what Joseph Schumpeter called a ‘process of creative destruction.’” Gilpin 2001, 56

[14] “Moreover, rather than being a neutral term, the concept may be loaded with policy and political biases. The equilibrium concept is central to economists' study of the market, but there are problems in using equilibrium as an explanatory or predictive tool.” Gilpin 2001, 56

[15] Polanyi 1944 [2001], Block 1990, Stiglitz 2003, Harvey 2005, Somers 2008, Giplin 2001, Granovetter 2001, Dobbin 2001, Mann 2013

“In this article, I have argued that most behavior is closely embedded in networks of interpersonal relations and that such an argument avoids the extremes of under- and oversocialized views of human action.” Granovetter 2001, 68

[16] I present seven assumptions here as a generalization of neoclassical economic assumptions. These seven assumptions were presented by Hiroshi Ono in his lectures for a graduate course in economic sociology in the fall of 2010.

No comments: