I Tip My Hat to the New Revolution

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Robert
Goldberg, in a recent National Review Online piece, “Continue
the W. Revolution
,” says “Republicans should honor and build
upon the political courage and intellectual honesty of George W.
Bush by pushing his program of Medicare and prescription-drug reform…”

However, Bush’s proposal represents no “revolution,” but simply
an extension of the welfare state that incorporates more market-like
mechanisms than does Gore’s proposal. Those who feel that there
is little possibility, at present, of repealing the welfare state,
and that the best near-term political result that can be hoped for
is to hold it in check, are probably correct. In terms of political
reality, the demand for some sort of prescription drug coverage
under Medicare may be overwhelming, and any politician who hopes
to get elected may have to acquiesce to this demand. No government
can survive for very long if it does not reflect the ideological
disposition of the majority of the people it governs.

Nevertheless, there is a very good reason to continue to promote
the ideal of a laissez-faire economy, even after acknowledging that
it is not going to come about any time soon. SUNY Purchase economics
professor Sanford Ikeda has written an excellent book, Dynamics
of the Mixed Economy
, in which he extends the analysis
of interventionism of Ludwig von Mises. Ikeda demonstrates the patterns
that the interventionist process is likely to follow. His analysis
begins with the Misesian insight that each government intervention
in the market will produce a result that, even from the point of
view of those promoting the intervention, is less desirable than
the state of affairs that existed before the intervention. This
is because the market participants are not supine in the face of
interference with their wishes.

An unhampered market brings about an outcome that conforms to the
voluntary preferences of market participants. Any interference with
the market process will, to some extent, thwart the realization
of those preferences. Market participants, in the face of this interference,
will act to reassert their desires. However, this process is now
made less efficient, due both to the overhead of the government
program itself and to its effect of distorting the market signals
of prices, interest rates, profits and losses. Entrepreneurs are
discouraged from pursuing opportunities in regulated areas. For
example, farm subsidies will make the search for more efficient
methods of farming less urgent. Meanwhile entrepreneurs pursue other
opportunities that, in the unhampered market, would have been considered
superfluous — consider the proliferation of lobbyists and tax accountants.

Several examples of the perverse effects of intervention are well
known. The negative impact of rent control, which creates the very
housing shortage and high rental costs it was designed to alleviate,
is extensively documented. Similarly, minimum wage laws worsen the
economic condition of those they were meant to help, through increasing
unemployment among the most impoverished.

Ikeda shows that, unless the prevailing ideology is strongly laissez-faire,
the problems resulting from one intervention lead to calls for other
interventions to fix them. People sense that “something is wrong,”
but unless they have a firm grounding in economics, it is difficult
to trace the problem to the intervention. As each succeeding intervention
moves the market further from its unhampered state, the process
of tracing the problem back through these myriad distortions becomes
torturous.

Nothing could illustrate this situation better than the “health-care
crisis.” Initial government interference, in the form of licensing
requirements, restricted supply and drove costs up. A further government
intervention, the wage controls imposed during World War II, led
employers to offer “free” health insurance in order to attract employees.
This third party provisioning of health insurance made health-care
consumers less price conscious, driving up costs still further.
The subsidy of demand through Medicare and Medicaid added yet another
factor increasing costs. The market responded with strange entities
such as HMOs. (Notice that we do not see AMOs in the automobile
industry, or CMOs in the computer business.)

In answer to the problems that have developed, the major policy
proposals involve, just as Ikeda predicts, further interventions
to correct the unfortunate consequences of past interventions. Goldberg,
as if to illustrate this point, says: “As most know by now, Medicare
currently provides coverage for hospital therapy and doctor therapy,
but not drug therapy. Failure to cover drugs in the current system
creates perverse incentives that waste resources and endanger patient
health… Both the Gore and Bush plans would improve on the current
situation…”

However, new interventions will simply add new distortions to those
added by previous interventions. It is impossible to “intervene”
the economy back to the state that the unhampered market would have
achieved, as there is no way, in the absence of the market process,
to discover what this state might have been.

Goldberg acknowledges that under either plan, there will be certain
drugs that are covered, and others that are not. He asks, “Under
which plan will these lists of drugs be more likely to be used to
limit access to new and better drugs at the price of increased risk
to patients?” But he fails to note that either plan will certainly
have the unwanted effect of focusing prescription and research on
listed drugs, to the detriment of patients who might have benefited
more from other drugs. When this problem is noticed, there will
surely be some politician recommending another intervention to correct
it, perhaps by asserting a patient’s “right” to a greater variety
of subsidized drugs.

Goldberg worries about increasing drug costs under Gore’s plan.
However, subsidizing drug purchases in any fashion can only lead
to increased costs. While it is true that some of this new spending
on drugs will be shifted from spending on hospitals and doctors,
other shifts will occur from other goods into medical spending,
where the marginal utility of an additional dollar spent has been
raised by the new subsidy.

This analysis of the intervention process might seem to counsel
despair to those who favor a free economy. But Ikeda contends that
the intervention process inevitably leads to a crisis, where the
effects of multiple interventions have become so pernicious that
the possibility of a dramatic turn toward free markets becomes possible.
The oil crisis of the late 1970s offers an example of such a crisis
point, when a deregulation of the oil industry that would have been
unthinkable a decade before took place fairly rapidly.

It is because of the existence of these crisis points that it is
important to continue to put forward the case for pure laissez-faire.
When the crisis hits, a turn toward the free market is not inevitable.
The other possibility is to turn toward socialism or fascism, in
order to eliminate the remaining “market failures,” and allow state
regulation full sway. Which direction the system takes in a crisis
will depend, to a great extent, on the ideological leanings of the
public. An important aspect of people’s decision is that they realize
that there is a choice. If the supposed defenders of the market
order have been pushing a series of interventions as “free market
solutions,” the public is likely to decide that laissez-faire has
been tried, and has failed. This is exactly what occurred in the
1920s and early 30s, as thoroughly documented by Murray Rothbard
in America’s
Great Depression
. Several Republican administrations, from
the purportedly free market party, engaged in an unprecedented amount
of economic meddling. When the crisis hit, it was widely seen as
a failure of laissez-faire, resulting in the New Deal. Now, we don’t
want that again, do we?

November
7, 2000

Gene
Callahan is a regular contributor to mises.org.

2000, Gene
Callahan

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