The Planning Fallacy

David Strom
|
Posted: Mar 06, 2008 11:53 AM
The Planning Fallacy

Imagine this scenario: an economist examines consumers’ automobile purchases and comes to the conclusion that the market is completely out of whack. By any rational measure consumers are making irrational decisions about what cars to buy, raising the costs of automobile purchases far above what is economically sensible.

Consumers could save huge amounts of money by buying the “best” cars based upon cost, safety, fuel consumption, and other criteria set up by experts. Better yet, by standardizing automobiles society could benefit from diverting enormous resources to other, more worthy social goods. Reducing the frequency of automobile purchases could save enormous amounts of money too, without significantly impacting mobility.

Only a few types of cars would be manufactured instead of the 340-plus models available today. Standardization would improve efficiency immeasurably. All cars would have interchangeable parts, all mechanics would be specialized in maintaining the few standard cars available, and drivers would never have to waste time figuring out how to turn on the lights or windshield wipers when we rent a car. Nirvana!

You can make this kind of argument with just about any product and easily arrive at the conclusion that the free market is wildly inefficient and should be replaced by the rational management of the economy by experts. After all, experts are better equipped to evaluate the costs and benefits of different products and optimize the results for all involved. A planned economy would be much more rational and fair than the wasteful chaos of the free market.

Of course this logic is built on pure fantasy: experts cannot adequately account for diverse consumer preferences; innovation will slow to a crawl as research and development gets centralized; and lack of competition will inevitably cause industry to stagnate and become increasingly inefficient. The history of socialist experiments bears these criticisms out.

Unfortunately it seems like this lesson is never learned, especially by the “experts” themselves.

The next wave of health care “reform” is driven by this logic. The solutions being peddled to an unsuspecting public include dramatically more government regulation, imposing “best practices” requirements on doctors and hospitals, and reducing the already restricted consumer sovereignty in health care.

The same surface rationality that would call for a state Bureau of Automobiles applies to the aggressive regulation of medical care. We hear constantly that our medical care is too expensive, of too uneven quality, and produces results far too poor for the money we spend. It is easy to marshal statistics which show that medical results in America are poorer than in our peer countries, despite much higher spending.

These statistics, though, are highly suspect for many reasons. Consider just one measure that is often used to prove the superiority of socialized systems to the American health care system: infant mortality. In the United States medical teams almost always try to save every baby, regardless of its chances of survival; in many “advanced” countries babies are counted as stillborn if their chances of survival are deemed too low. Hence the US can simultaneous save more babies’ lives while appearing to have a higher infant mortality rate.

In comparing apples to apples you get a much different picture. Statistics like infant mortality and lifespan are poor measures of the health care system, because they measure many variables in one overall number (average life spans, for instance, are influenced by murder rates, car accidents, risk-taking behavior, diets, genetic variables, etc.). If you compare medical care to medical care, the U.S. system looks considerably better.

Consider cancer survival rates. If you examine five year survival rates in the United States versus Europe, a startling fact emerges: Americans have far higher 5-year survival rates from cancer. Among women the 5 year survival rate for Europeans is only about 90% of America’s. Among men the difference is stark indeed: European men have only 71% of the 5-year survival rate as American men. American health care starts to look pretty good.

And measurable outcomes are only one component of consumer satisfaction, which should be the goal of health care providers. Just as with other kinds of consumer products, it is impossible for a panel of experts to define what is “right” for consumers, no matter how precise their data or how sophisticated their models of what we “ought” to want. Government planners are no better equipped to manage and regulate our health care system than the supply and demand for automobiles.

Just as in other areas of life, there is no “one size fits all” model of health care provision.

There is no doubt that our current health care system needs reforms, largely due to the enormous government intervention already present in the system. Government directly pays for about 45% of health care expenditures, and influences the totality of spending through tax subsidies of third-party payer systems. These interventions distort our health care spending enormously.

The solution, though, is not more government intervention in the system, but less. The logic of consumer sovereignty which works in the automobile, housing, food, and consumer products sectors of our economy should be applied as well to the medical sector as well. Freer markets really are the most effective way to increase consumer satisfaction.