The Market Doesn't Ration Health Care

Or anything else.

This TGIF first ran August 7, 2009. It seems appropriate today.

Health care reformers say they have two objectives: to enable the uninsured and under-insured to consume more medical services than they consume now, and to keep the prices of those services from rising, as they have been, faster than the prices of other goods and services. Unfortunately, Economics 101 tells us that to accomplish those two things directly—increased consumption by one group and lower prices—the government would have to take a third step: rationing. The reformers are disingenuous about this last step, and for good reason. People don’t like rationing, especially of medical care.

But some defenders of government control acknowledge that rationing is the logical consequence of their ambition. They parry objections by saying in effect: “So we’ll have to ration. Big deal. We already have rationing—by the market.”

For example, Uwe Reinhardt, an economics professor and advocate of government-controlled medicine, writes, “In short, free markets are not an alternative to rationing. They are just one particular form of rationing. Ever since the Fall from Grace, human beings have had to ration everything not available in unlimited quantities, and market forces do most of the rationing.”


Efficient Pricing

Sadly, interventionist economists are not the only economists who talk this way. Most free-market economists would agree that where there is scarcity there must be rationing and that the most efficient way to ration is by price, that is, through the market.

This is factually wrong and strategically ill-advised. As we’ll see, markets–even completely free markets–do not ration. Thus the health care debate is not about which method of rationing—State or market—is superior.

Let me be clear about what I am not denying. I am not denying that economic goods are by definition scarce and that at any given time we must settle for less of them than we want. I am also not denying that the marketplace is relevant in determining who gets how much of those scarce goods.

I am denying that this is appropriately called “rationing.”

Markets Don’t Do Anything





Mises and Hayek

This is squarely in the Austrian conception of the market as set out by Ludwig von Mises and F. A. Hayek. The market order “has no specific purposes but will enhance for all the prospects of achieving their respective purposes,” Hayek wrote in volume two of Law Legislation, and Liberty.

The market was never set up by people to achieve a purpose. It is not a device or an invention aimed at satisfying an intention. “Market mechanism” is a metaphor. The market — as a set of continuing relations among people — emerged, unplanned and unintended, from exchanges, initially barter, in which the parties intended only to improve their respective situations. Lecturing at FEE . . . , Israel Kirzner recalled that one of the first things Mises said to him as a graduate student was, “The market is a process,” by which he meant “a series of activities.” This is similar to what the French liberal economist Destutt de Tracy (1754–1836) wrote in A Treatise on Political Economy, “Society is purely and solely a continual series of exchanges.”

Mises, Hayek, and Tracy help us to sort out the rationing question. I submit it makes no sense to say that an undesigned series of exchanges rations goods. If we were to observe a free market (wouldn’t that be nice?), what would we see? Rationing? Allocation? Of course not. We would see people exchanging things—factors of production, services, and consumer goods—for money. Where would they have gotten those things? From previous exchanges or original appropriation from nature.


Consumer Choice

When a person buys five apples in a grocery store rather than ten because he wishes to use the rest of his money for other purposes, it seems entirely wrong to say the market (or even the grocer) has rationed the apples. The customer makes his choice on the basis of his preferences and the money available (which is the result of previous transactions).

It is true that as a result of market exchanges, goods and resources change hands and (except for land) locations. But in no sense is this rationing or allocation. The resulting arrangement of resources is simply a product of many transactions. Of course, people’s choices of what and what not to buy and sell at which prices create an arrangement of goods and resources that tends to be intelligible in terms of consumers’ subjective priorities. But that does not warrant calling the process rationing or allocation.

Those words—especially ration, which shares its root with rational–suggest conscious decision-making—as part of a plan—by an agent. In a free market there is no consciousness overseeing this “distribution”—another inappropriate word when it comes to describing the market process.

I am not saying anything that a good economist or thoughtful person doesn’t know. I am merely pointing out that we can be more effective in the health care debate if we are more precise in our language. We do not face a choice between methods of rationing medical services. We face a choice between rationing according to a bureaucratic plan and being freed to engage in mutually beneficial exchanges.

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