Wassily Kandinsky ‘Cemetary and Vicarage in Kochel’Two articles:
One on Zero Hedge turns out to be an appreciation of Austrian economist Freidrich von Hayek;
Appreciation for Hayek continues to spread: As the freshwater and saltwater economists continue their never-ending fight to see who could be more reluctant to consider ideas that fit outside their narrow frameworks, many people are starting to embrace the idea of the Austrian school of economics. After reading some great material on the Austrian school, I wrote an article on Hyman Minsky and now Amity Shlaes has penned on op-ed piece on the Austrian- influenced economist Friedrich von Hayek. According to Shlaes, one of Hayek’s ideas that is most pertinent to today has to do with the loss of personal freedoms at times of national stress. Hayek believed that wars and crises led to national planning, creation of influential special interest groups and an erosion of individual liberties.
As the war came to end, Hayek penned an apocalyptic tract, “The Road to Serfdom.” His thesis was that war gets people used to national planning. So the planners continue to plan, even in peacetime. These incremental expansions of the social- welfare state aren’t benign. They foster the creation of ever- more-powerful interest groups. The economy becomes less productive. Political corruption in turn gives rise to dictators. Foreign-policy tension or economic crisis accelerates the trend.
“‘Emergencies,’” Hayek wrote, “have always been the pretext on which the safeguards of individual liberty have eroded.”
For a number of decades the main thing about Hayek seemed to be that he was wrong. Britain did head to the left, far to the left. After the war, the U.S. also institutionalized government planning in new areas. Yet neither Britain nor the U.S. went socialist or trampled personal freedoms. On the contrary, they eventually turned toward Margaret Thatcher and Ronald Reagan…
But this low estimation of Hayek fails to appreciate his central thought: the economic damage is subtle and is evident only over time…
Hayek understood that a good decade where government expansion seems to stall — the 1990s — doesn’t mean government won’t expand when the next crisis comes.
The recent pattern of following a war and a financial collapse with the creation of a new entitlement is a perfect example of the Hayekian dynamic in action…
The U.S. is on the road if not to serfdom then to less growth, less innovation, more rationing and more political corruption…
In the post- modern context Hayek comes across as a crank; lugubrious and un- ironic. Ours is the most ironic of periods; it is hard to see Hayek gaining much traction as his audience seems to be content to sit and watch the world unwind on television and laugh about it.
A second article was a long apologia for conscription into centralized insurance by Mark Thoma:
Why We Need an Individual Mandate for Health Insurance
By Mark Thoma | Nov 13, 2009 |
There’s a similarity between used cars and health care.
Let’s start with used cars. “The Market for Lemons” by George Akerlof is a famous paper in economics demonstrating how markets can break down when buyers and sellers are differentially informed. For example, suppose that there are 1,001 used cars worth from $0 to $1,000, i.e. one car is worth $0, one is worth $1, the next is worth $2, and so on up to a car valued at $1,000. Assume that the car owners can assess the value of the cars they are selling accurately, but buyers can’t discern any difference in quality from examining the cars. That is, sellers are better informed than buyers about the car’s quality.
In such a market, a buyer would expect to receive a car of average quality, and the price would settle at $500 (the exact price doesn’t matter, all that’s required is that the market sets some price below $1,000). But at a price of $500, all the sellers with cars valued from $501 to $1,000 would withdraw their cars from the market since the price of $500 is less than their cars are worth.
At this point, the only cars left on the market are valued between $0 and $500, and with buyers once again expecting to receive a car of average quality, the price would fall to $250. At this price, all the people with cars valued from $251 to $500 would take their cars off the market, and the cars left on the market would now be valued between $0 and $250.
The process repeats itself, the price drops to $125, more cars drop out, and this continues until there is just one car on the market selling for $0, that is, the market for used cars breaks down.
The technical term for this is an adverse selection problem, and there are many ways to solve it. The buyer can hire a mechanic to determine the value of a car before the purchase, the sellers can offer insurance against the car breaking down, the sellers might have a desire to maintain a reputation for quality (dealers selling cars that fall apart shortly after purchase will lose their reputations and go out of business), and so forth.
What does this have to do with health care? The adverse selection problem is one of the reasons we need an individual mandate for health care insurance (i.e. a requirement that everyone must purchase insurance that is part of the proposed health care reform package).
To explain how the adverse selection problem arises in these markets, note that people purchasing health insurance generally have better information about their health status than the people selling the insurance. If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them, and all of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and the result is just like in the used car example above: the market breaks down and nobody (or hardly anybody) can purchase insurance.
With all due respect to Mr. Thoma, his argument is completely frivolous, incompetent and without merit. Adverse selection is irrelevant.
Medical care is a ‘good’, it’s the outcome of acts on human bodies by other humans. It requires a workplace, tools, time and art. At some point all humans need some medical care.
Insurance is a derivative, a claim against heath care. It is an abstraction; insurance is not integral to the care ‘good’ but ‘financial innovation’ superimposed upon it. Think of insurance as a kind of credit default swap.
The ‘client’ pays the broker a fee in return for which he is eligible to receive a sum of money under certain ‘default’ conditions. With a CDS, the broker pays the default sum and receives the defaulted credit instrument in return. With the health care default swap, the broker pays the sum and in return gains … what, exactly?
The urn containing the client’s ashes?
As is usual in post- modern America, attention is lavished upon the financial intermediaries and the derivatives. Meanwhile, the good itself falls farther out of the reach of the end- users. The reason for this the inflationary effect of the brokers’ collusional payment regime; medical care has become another asset ‘bubble’.
The end of your argument is the requirement for ‘universal derivatives’ . I cannot conceive of anything more outrageous!
I don’t recall when Mr. Thoma became a pitchman for the financial services industry, the same industry which has invaded every aspect of American citizens’ lives, picking every American’s pocket. The government has become the ally and enabler of this industry, becoming universally despised in the process.
Despised, Mr. Thoma, despised!
The endless intermediation and attendant claims is shameful and egregious; is there no end to it? What are you aiming for, a violent revolution? Much more of this and the tycoons will be swinging from lampposts. Every one the mob can get their hands on!
What you desire is a bailout of yet another part of the Wall Street cabal this time by individuals. What new devilry is this? The bailout will be forced out of us by the police powers of the state! Over my dead body!
I don’t believe it but that crank Hayek was right!
Mark Thoma should be ashamed of himself. No wonder economists have a bad name!