Are Medical Entrepreneurs Parasites? The Government Believes They Are

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by William L. Anderson: Krugman's
Greek Temple of Keynesianism



I’ve not posted
since the U.S. Supreme Court upheld the insurance mandate of Obamacare,
and am leaving much of the back-and-forth to other writers. Peter
Schiff writes
that if the government really does have the authority
to levy a “tax” upon any citizen who does not purchase what the
government demands they buy, then there really are no more checks
on the power of government.

I tend to agree.
In the last decade, we have seen exponential growth of the surveillance
state, the prison state, the militarization of the police, and we
now have a president who believes he has the authority to order
missile strikes anywhere in the world and to kill whomever he likes
— and it all is done “under color of law.” In other words, lawless
behavior by state agents now is an oxymoron, since by definition,
state agents cannot break the law.

decision will unleash the IRS in a way that will astound people,
and one can bet that the powers that government seized with the
passage of the Patriot Act and other such legislation will be put
to use in new and oppressive ways. Furthermore, this decision will
further unleash to power of federal prosecutors to criminalize just
about anything they choose.

(I deal with
their brutality of the innocent in
my other blog
, not that Keynesians really care about the brutality
of the state. They just want to see more because, in their minds,
a leftist state cannot be brutal since by definition, socialism
cannot oppress.)

However, according
to Krugman, the decision by the Supreme Court
is something I
should cheer because I now am a “winner.” Funny, I don’t feel like
a winner, probably because I actually understand what socialism
does to medical care over time, something that I doubt any Keynesian
ever could understand because, frankly, Keynesians don’t understand
(or want to understand) the simple act of production. And forget
the role of entrepreneurship in medical, as Keynesians would consider
even the possibility of such to be anathema.

The Keynesian-Socialist
View of Production vs. Ludwig von Mises and Economic Calculation

During the
Calculation Debate
between Ludwig von Mises and Oskar Lange
in the 1930s and 40s, Lange demonstrated what I would call a mainstream
view of how production and the firm might work. Indeed, what he
said was hardly different from what I was taught in my production

In mainstream
neo-classical analysis, one analyzes production via the production
function and input prices. (Yes, I constructed many a cost function
using both things.) If one has both, then one can deduce the optimal
use of inputs in production. (When graphing these items, the “optimal”
position — where costs are minimized — is found where the production
function, or isoquant, is tangent to the isocost.)


Lange held
that a production function was pretty easy to find, and that government
central planners could find prices simply by checking the commodities
exchanges in the capitalist world, and with both in hand could then
“plan” an entire economy by solving a huge batch of simultaneous
equations. In fact, economists in the former Soviet Union became
quite good at solving these equations by using matrices, and while
their economic calculations generally turned out to be disastrously
applied, nonetheless the world of matrix algebra advanced.

Lange argued, actually would be more effective than capitalism
because capitalists, after all, had to waste time and money making
profits. Socialist production, having solved the issue of economic
calculation, would produce more goods that were superior to what
might be produced in the capitalist economies, or so he declared.

That is the
essential argument that people like Krugman and Paul Craig Roberts
have made about medical care. Everyone knows the “medical production
function,” right? So, what’s the problem? For example, Roberts

The American
health care system is the most expensive of all on earth. The
reason for the extraordinary expense is the multiple of entities
that must make profits. The private doctors must make profits.
The private testing centers must make profits.The private specialists
who receive the referrals from general practitioners must make
profits. The private hospitals must make profits. The private
insurance companies must make profits. The profits are a huge
cost of health care.

However, he
adds, “single-payer” (which essentially is socialist or fascist,
since fascism left much production in private hands with the state
declaring what should be produced) eliminates the problems caused
by profits:

The beauty
of a single-payer system is that it takes the profits out of the
system. No one has to make profits. Wall Street cannot threaten
insurance companies and private health care companies with being
taken over because their profits are too low. No health-provider
in a single-payer system has to worry about being displaced in
a takeover organized by Wall Street because the profits are too

What Roberts
does not say, but what is obvious from his words is that we should
not stop at medical care. If we know the proper production function
for all aspects of medical care (which seems to be an assumption
here) and if government simply by fiat can declare whatever prices
it sees fit with no problems of resource misallocation, then directing
a “rational” system simply is a matter of doing the math.

Roberts would
argue, not doubt, that many of the profits in the medical system
are not due to “free markets,” but rather government favoritism
given to politically-connected firms. Yet, even though government
involvement via a regulatory system politically creates rents, his
“solution” is for government to have even more regulatory power.
Yet, if government already is a toady of private enterprise, as
he says, then why should one expect that by the simple act of giving
government even more power in the pricing and paying of medical
care, that corruption would disappear and regulators suddenly would
become pure in heart and be possessing the ability to perfectly
allocate medical resources?

Likewise, Krugman
argues that markets are the problem
, and certainly not a solution
in medical care, writing:

There are
two strongly distinctive aspects of health care. One is that you
don't know when or whether you'll need care — but if you do, the
care can be extremely expensive. The big bucks are in triple coronary
bypass surgery, not routine visits to the doctor's office; and
very, very few people can afford to pay major medical costs out
of pocket.

This tells
you right away that health care can't be sold like bread. It must
be largely paid for by some kind of insurance. And this in turn
means that someone other than the patient ends up making decisions
about what to buy. Consumer choice is nonsense when it comes to
health care. And you can't just trust insurance companies either
— they're not in business for their health, or yours.

This problem
is made worse by the fact that actually paying for your health
care is a loss from an insurers' point of view — they actually
refer to it as "medical costs." This means both that
insurers try to deny as many claims as possible, and that they
try to avoid covering people who are actually likely to need care.
Both of these strategies use a lot of resources, which is why
private insurance has much higher administrative costs than single-payer
systems. And since there's a widespread sense that our fellow
citizens should get the care we need — not everyone agrees, but
most do — this means that private insurance basically spends a
lot of money on socially destructive activities.

is interesting and very telling from two different viewpoints. First,
Krugman has limited the entire conversation to “markets” for systems
of payments for medical care, the third-party system, yet there
is an entire web of complex relations within medical care that he
ignores. (He does claim that improvements (like the MRI device)
responsible for the high cost of health care
, which would make
medical care quite unique because capital in a market economy tends
to allow more goods to be created with fewer resources, but since
he others already have declared that medical care is “different,”
then capital in the medical field apparently is a liability, not
an asset.)

Krugman does not even address the efficacy of third-party payments
themselves, yet the proliferation of third-party payments for anything
is going to mean that an important connection in economic exchange
is distorted. The role of third-party payments in the rise of medical
costs hardly is controversial, but Krugman seems to accept that
the system can function only if all payments come from third

The second
point is that Krugman implies that a government system would not
deny care, as though the Law of Opportunity Cost applies only to
private insurers. Yet,
even Krugman himself has endorsed denial of care
and, yes, “death
panels” (his words) as a way to hold down costs. So, one supposes
that government is not subject to opportunity cost, but if it is,
government agents will act wisely and compassionately.

Thus, we are
supposed to conclude that (1) medical care is different than any
other good one might purchase, (2) opportunity cost applies only
to private care or at least manifests itself less if government
agents decide who is to receive care, and (3) since everyone already
knows the production function and since government has the power
to set prices, there is no economic calculation problem, which means
that the system does not need profits and losses to guide its decision

Is There
a Role for Entrepreneurs in Medical Care?

In the MBA
classes I teach, I emphasize the role of the entrepreneur, not simply
as an individual, but also the role of entrepreneurship within the
firm itself. I use a lot of material from the Austrians, including
Peter Klein’s new book, The
Capitalist and the Entrepreneur: Essays on Organization and the

Klein reminds
us that most of the mainstream economic literature long ago discarded
the entrepreneur as either socially useless (or even harmful) or
irrelevant in a world of “economic” analysis based upon production
functions, “given” input prices, and probabilities. These things,
many mainstream economists believe, have demystified economic analysis
to the point where any semi-competent economist, along with bureaucrats
from the Federal Trade Commission or the Department of Justice,
can both see and create the “optimal” system of production.

The Soviets
certainly believed the entrepreneur was nothing more than a parasite,
and all private entrepreneurship (legally called “speculation”)
was outlawed, with execution as a penalty always on the table. Production
functions were obvious and planners could find prices by reading
the Wall Street Journal, so the system did not need entrepreneurs,
and especially did not need profits, as socialism already had done
away with profits, which were nothing more than what Marx said they
were: an unjust expropriation of the compensation that belonged
to the workers.

As the Soviet
economic planners found out, however, this was not a formula for
“rational production,” but rather a prescription for utter chaos.
The economy of the former U.S.S.R. was legendary for its shortages,
its poor-quality products, bad food, and, yes, poor medical care.
When the Soviet Union still existed, American defenders would agree
that maybe the government was too repressive and, yes, its economy
was not good.

However, they
would add: “It has free healthcare.” (Likewise, I remember
when a Marxist who teaches economics at the University of Tennessee-Chattanooga
claimed that Romania’s economy under communist rule was superior
to that of the western nations because “there is no unemployment

One of those
former Soviet planners, Yuri Maltsev, has
written about what that “free” care
was like for ordinary people:

Being a People's
Deputy in the Moscow region from 1987 to 1989, I received many
complaints about criminal negligence, bribes taken by medical
apparatchiks, drunken ambulance crews, and food poisoning in hospitals
and child-care facilities. I recall the case of a fourteen-year-old
girl from my district who died of acute nephritis in a Moscow
hospital. She died because a doctor decided that it was better
to save "precious" X-ray film (imported by the Soviets
for hard currency) instead of double-checking his diagnosis. These
X-rays would have disproven his diagnosis of neuropathic pain.

the doctor treated the teenager with a heat compress, which killed
her almost instantly. There was no legal remedy for the girl's
parents and grandparents. By definition, a single-payer system
cannot allow any such remedy. The girl's grandparents could not
cope with this loss and they both died within six months. The
doctor received no official reprimand.

As one reads
the tales of Soviet medical care, it is clear once again that socialism
is a system in which the consumer plays no role. Whether it was
doctors and medical personnel killing patients or forcing them to
pay bribes for basic care, patient care was the lowest priority.
Ironically, at least one prominent Democrat politician, following
the SCOTUS decision on Obamacare, declared that a future step should
be the unionization of doctors
. One can be assured that if this
is part of our medical future, actual care for individuals will
be secondary to preserving the political players in the system,
as doctors through their unions will receive even more political

One of the
characteristics of a socialist economy was the various “time warps”
that it created. When the Berlin Wall fell in 1989 and East Germans
soon began to drive their Wartburgs and Trabants over the formerly-forbidden
border to West Germany, people found that there was little difference
between the 1989 Wartburg and the 1948 make of the same car. During
my visit to East Germany in 1982, I found that much of the country,
from its infrastructure to its street lighting looked unchanged
from the 1940s.

Why the time
warp? In a word: entrepreneurship, or the lack, thereof. While a
lot of economists tried to explain the difference between the East
and West as being to to “superior technology” in the West, that
really is no explanation at all. New technologies do not magically
appear; entrepreneurs must find a way to apply technologies in a
way that will appeal to both the needs and budgets of average people. 

Economic entrepreneurship
in the old communist bloc was a crime; furthermore, a bureaucratically-run
economy was going to be resistant to change because governments
are loathe to take any kinds of risks. Car manufacturers stayed
with the “safe” production function. Bureaucrats rarely receive
any rewards for being right when they take risks, but often are
punished for making errors, unlike entrepreneurs, who receive profits
when they make correct decisions about the future and losses when
they are wrong.

In the West
and Japan, however, auto manufacturers had at least a measure of
private entrepreneurship, and the result was a better automobile,
even in the face of massive government political and regulatory
interference with the production process. (Yes, some companies were
bailed out, and it is my belief the government should have simply
let Chrysler and General Motors go out of business. Entrepreneurship,
after all, works best with a profit and loss system.)

What both Krugman
and Roberts claim is that the real problem with medical care
is entrepreneurship, and once the entrepreneur is removed from the
picture and government directs the resources within the system,
all will be well. Yet, why should that be the case we see opposite
results elsewhere?

In the end,
the single-payer advocates claim that medical care is different,
and is not subject to the laws of economics. That would be a first
in all of human history: a scarce good that is not subject to the
Law of Scarcity.

all of the talk of “American Exceptionalism,” the real exception
in the United States historically has been that entrepreneurs have
had great freedom here, and we as citizens and consumers have benefited
mightily from their actions. For that matter, every medical device
that has saved lives and every development of medical procedures
that make once-impossible surgeries now easy and commonplace has
come ultimately through entrepreneurship. 

And what will
happen if the government tries to outlaw medical entrepreneurship?
The system ultimately will slowly deteriorate, medical innovation
will come to a halt, and patients will find themselves at the bottom
of the totem pole.

Another thing
will be commonplace, too. We will see politically-connected people
like Paul Krugman and Michael Moore either using their great wealth
to receive medical treatment in other countries that are not as
restrictive as the USA, or they will use their political connections
to be bumped ahead of everyone else. Oh, and Krugman and Moore and
others will continually be propagandists in telling us how good
we have it now that we have state-run medical care.

2, 2012

L. Anderson, Ph.D. [send him
], teaches economics at Frostburg State University in Maryland,
and is an adjunct scholar of the Ludwig
von Mises Institute
. He
also is a consultant with American Economic Services. Visit
his blog.

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