Competition: Just What the Doctor Ordered

By now we should have figured out the cure for what ails the American health care system: a regimen of unadulterated competition. It’s just what the doctor (of sound economics, that is) would order.

Competition is the universal solvent: it dissolves all kinds of problems. (I refer to competition in its broadest sense, including what goes on in the unrestricted marketplace of ideas.) The reason competition is so effective at enhancing public welfare is that no person or group has a monopoly on knowledge and wisdom. These are scattered throughout society, and we cannot know who has the information or vision that is exactly what some or all of us are looking for. With goods and services, knowledge comes largely in the form of prices, which communicate supply and demand conditions and give entrepreneurs clues to how they can satisfy hitherto unsatisfied consumer demand and thereby earn profits.

Everything in the previous paragraph applies to medical care and insurance. The dogma that such services and products are outside the scope of economics is merely self-serving nonsense. Medical services and products, which people have to create, are scarce, and they are desired by consumers with limited resources. As long as that’s true, the health care industry will be subject to the laws of economics. Those laws are as unyielding as the laws of physics, the only difference being that the consequences of violating them may take longer to appear. But if those law are persistently violated, they will take vengeance on everyone. We have enough theory and experience to know that by now.

Presumably no one believes the American medical system is driven by competition. It is not now, and it was not before the Patient Protection and Affordable Care Act (Obamacare) was enacted in 2010. Thus merely repealing Obamacare would not restore a free and competitive market in medicine. Many more things would have to be repealed, both at the national and state levels.

How is competition curtailed? Let me count the ways. The practice of medicine (physicians, nurses, etc.) is licensed by state governments. The medical-facility industry is largely governed by state certificate-of-need requirements. Medical schools are subject to government-linked accreditation. The insurance industry is ruled by 50 state governments in cahoots with insurers and, since 2010, the national government; the Department of Health and Human Services defines basic coverage, criteria for acceptance, and price rules. Drugs and medical devices are the domain of a government bureaucracy, the Food and Drug Administration (FDA) and patent law. Individuals are mandated to have insurance. This only scratches the surface.

In other words, competition is confined to narrow channels defined by bureaucrats, whose policies are never subjected to market tests. This means that real competition does not occur at all. To limit competition by fiat is to cripple it -- that is, to keep it from doing the good work it’s capable of doing.

What is that good work? F. A. Hayek described competition as a “discovery procedure.” We must not assume that we know all that we need to know in order to achieve consumer welfare. The trial-and-error scramble for profits by satisfying consumers yields knowledge, often tacit, that would not have been stumbled on had buyers and sellers not faced real alternatives uses for  their scarce resources. No bureaucracy could hope to simulate that. “The solution of the economic problem of society is .. always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before,” Hayek wrote in “The Meaning of Competition.”

Hayek stressed that competition cannot do its work if government doesn’t give it free rein: “How would conditions differ if competition were ‘free’ in the traditional [rivalrous] sense from those which would exist if, for example, only people licensed by authority were allowed to produce particular things, or prices were fixed by authority, or both? Clearly there would be not only no likelihood that the different things would be produced by those who knew best how to do it and therefore could do it at lowest cost but also no likelihood that all those things would be produced at all which, if the consumers had the choice, they would like best.”

Competition has institutional prerequisites. If it is to do its good work, certain principles must prevail: property rights, contract sanctity, freedom of entry (see Milton Friedman’s devastating chapter “Occupational Licensing” in Capitalism and Freedom [1962]), and consumer sovereignty -- in a word, freedom. If we don’t get the institutions right, competitive forces will be channeled into undesirable areas, such as winning the favor of bureaucrats.

Some, like Paul Krugman, are appalled that people seeking medical care are seen as consumers. What they overlook is that if people are not free consumers, they will be wards of the state. Which would you prefer?

Sheldon Richman

Sheldon Richman is the executive editor of The Libertarian Institute, senior fellow and chair of the trustees of the Center for a Stateless Society, and a contributing editor at Antiwar.com. He is the former senior editor at the Cato Institute and Institute for Humane Studies, former editor of The Freeman, published by the Foundation for Economic Education, and former vice president at the Future of Freedom Foundation. His latest book is America's Counter-Revolution: The Constitution Revisited.