Rational Rationing

The healthcare reform debate has generated much heat but very little light.  (And it’s also getting a lot of coverage, so there’s very little else to report about this week.)

I wrote a couple of months ago my opinion of two simple (but unpopular) steps that would make high-quality healthcare affordable to virtually everyone: abolishing the employer tax deduction for health insurance, and slowly phasing out Medicare.  The entire national debate is going in the opposite direction, with one party offering Medicare (or something like it) to everyone, and the other party opposing this because it would threaten Medicare.

In this hullabaloo, there is one word being shouted that I think deserves more explanation: rationing.

Classical economics is founded on a rule called the principle of scarcity which states that the sum of everything that everyone wants exceeds everything that exists.  People want more stuff than all the stuff in the world.  That means that some desires go unmet.  Every economic system is essentially a system to address scarcity by establishing rules that determine who gets what – which needs are met and which are not.  That is the definition of rationing: a method of distributing stuff in a world of finite resources and infinite demands.

That means that every economic system that has ever existed has used rationing in one way or another.  In a feudal system, the local lord distributed land to his vassals.  In centrally planned economies the government allocates all goods and sets prices.

Free economies have rationing too.  In free economies virtually all transactions are voluntary.  No one is forced to buy or sell a good or service, and the price depends only on the consent of the involved parties.  No one is forced to sell me apples, I don’t have to buy apples, and the price of apples can be whatever I and the grocer both agree to.  This is also a kind of rationing; it is rationing by price.

Rationing by price has lots of advantages.  The first is that I ultimately decide which of my desires are met and which are not by choosing what I will buy in exchange for my finite dollars.  Since everyone has different values, preferences and goals, there is no better way of getting the most for your dollars than in making these decisions yourself.

Rationing by price also results in the best products and services at the cheapest prices.  Suppliers, forced to compete with each other for customers, can only survive by continually making better stuff cheaper.

Now, there are some goods and services that, by their nature, just can’t be distributed through free markets because they are delivered to entire groups, not to individuals.  For example clean air, local law enforcement and national defense couldn’t be pragmatically purchased by each individual citizen in whatever quantity she chooses.  But for the vast majority of other goods and services, rationing by price has led to better products at cheaper prices than any other method.  Moreover, in a history marked almost entirely by grinding poverty, free markets and rationing by price is the only method that has produced societies with any degree of comfort and affluence for its average citizens.

If healthcare is important, maybe we should consider distributing it the way that works best – by each of us spending what we can afford to get what we believe we need.  There would still be a role for government programs and private charities in the care of the indigent, but the rest of us would have access to terrific inexpensive care.

Instead we spend our (and our employers’) money on an insurance policy and wait for them to tell us what’s covered, while our elected officials debate whether government should control more of the healthcare marketplace or all of it.

Learn more:

For someone (like me) with virtually no formal background in economics, I know of no better introduction than ”Basic Economics” by Thomas Sowell.

My post in June:  The Healthcare Meltdown – Part IV, A Recipe for Reform

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