Against the Welfare State – and Bank Bailouts

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The welfare state is undoubtedly one of the elements of government opposed by libertarians, not only due to its inherent injustice and economic destructiveness, but also because of its ability to provide fuel and sustenance to the growth of the metastasising state

If we are launch a critique of the welfare state we must first attempt to define it and to distinguish it from other categories of government activity. Such a task is not an immediately clear cut one as, fundamentally, all government expenditure sustains the welfare of its beneficiaries. If the government launches an invasion of a foreign country, spending on military grade weaponry, aircraft and whatever else will very much contribute to the “welfare” of armaments manufacturers yet we wouldn’t ordinarily classify this as part of the welfare state. Similarly, if the government decides to build a new road or railway line we wouldn’t usually describe this as providing “welfare” to the construction workers who undertake the leg work (although certain “job creation” schemes that simply pay people to carry out pointless work could be classified as welfare).

Whether or not a particular government outlay is classified as part of the welfare state is therefore defined more by its purpose rather than by its effect. The purpose of a foreign war is usually to gain control of valuable resources (even if it is veneered with an alternative justification such as spreading freedom and democracy). The purpose of building a road or railway is to “improve” the country’s transportation and communication networks. None of these projects is designed to provide some kind of comfortable lifestyle to those who undertake them (and, ignoring the possibility of benefiting favoured lobbyists and donors, to the extent that a government has a particular purpose in mind and wishes to achieve it efficiently it will have a desire to remunerate its suppliers as little as possible rather than as highly).

Welfare spending, on the other hand, is markedly different. Its purpose is always couched in the language of providing some kind of “help”, “care”, or “assistance” to the citizenry, as if the government is a giant nanny who appears with an equally giant milk bottle whenever one’s own teat runs dry. Given this, then, we can attempt to define the welfare state as that portion of government activity which is devoted to the sustenance of either the existing lifestyle of a particular citizen or to a lifestyle that is thought to be the minimum that is equitable in terms of wealth and income. The welfare state therefore provides a cushion or relief from events that may intercede in that lifestyle so, for example, if you get sick, the government will provide you with either free or subsidised healthcare; if you lose your job you will be entitled to unemployment benefit; and if you have baby the government will give you some money so that you are able to take care of it and give it an “adequate” upbringing. Granted, this definition if the welfare state is not precise and it will overlap with many other types of expenditure – few government outlays have a single purpose, even if some of these purposes are not made public – but we can be satisfied that it is reasonably accurate.

In spite of the fact that the welfare state is a moral issue and that its proponents believe that its existence is justified by the fact that the able should take care of the less able (“from each according to his means to each according to his needs”) it is arguable that the strength of its cause derives more from a misunderstanding of economics and that an amelioration of these misunderstandings is likely to weaken the foundations of the welfare state most effectively. Rather, therefore, than elaborating on the fact that the welfare state is, in a genuine free market, a morally unjustifiable confiscation and redistribution of property from its owners to non-owners respectively, let us concentrate mainly on a proper realisation of the economic effects of the welfare state in order to find the source of its undoing.

The type of welfare spending that we will focus on specifically is the bailout of the banks. This selection may appear surprising as surely most supporters of the welfare state are flat out opposed to bailing out the banks? And yet if we look closely, the qualities of bankers’ bailouts fits our definition of welfare spending all but perfectly. The financial services industry was accustomed to its business of expanding credit during the boom years and ploughing them into ultimately unsustainable malinvestments; its practitioners were richly rewarded for doing so and could afford big houses, expensive cars, private schools for their children, exotic foreign holidays, and so on. Metaphorically, they became accustomed to a lifestyle of gambling and partying fuelled by the punch bowl of monetary expansion. Following the inevitable crash that revealed the extent of the malinvestments and the huge losses that would ensue, the bailout of the banks was designed precisely to prevent the liquidation of this crumbling economic structure so that the banks could keep on making loans, keep on making profits from those loans, and so their top employees would not lose the lifestyle to which they had become accustomed. It was meant to refill the punch bowl and to keep the music playing so that the party would never end. The difference, therefore, between bankers’ bailouts and what we typically regard as the welfare state is simply a matter of degree, not of kind. They each provide a taxpayer funded cushion for their respective beneficiaries that insulates their lifestyles from the effects of either their own choices or from events that are beyond their control. Indeed, the collapse of the financial services industry as we know it would also have seriously curtailed the ability of governments to retain their accustomed lifestyle of borrowing and spending. To that extent, therefore, the bank bailouts were an exercise in self-preservation. The only perceived difference between bank bailouts and the welfare state is that the beneficiaries of the former were “rich” and not “poor”, which, it must be understood, is itself a misrepresentation. Many of those affected by a collapse of the financial services sector would not necessarily have been multi-millionaires as any insolvencies and downsizing is likely to have hit those lower down the pecking order first such as local branch managers and tellers before it hit those in the penthouse offices.

We have outlined this description of bank bailouts because every single argument that welfare statists use to oppose them are, in fact, the very same arguments that apply to their conception of the welfare state. We will therefore take each of these arguments in turn and show just how both bank bailouts and the welfare state, which are both a form of welfare spending, are economically destructive.

The first argument against the bank bailouts used by its opponents is that it creates moral hazard. In other words, if the banks can privatise their gains yet socialise their losses it provides an incentive to carry on and, indeed, augment the very destructive activity that was the source of the problem in the first place. All of this is true and we can have no quarrel with it. Yet it applies equally to the welfare state as well. Proponents of the welfare state imagine that if the government throws money at all of the events that manifest themselves as pitfalls in one’s own lifestyle then these pitfalls will simply go away. However if the government simply pays for a problem when it occurs then it creates as much of a moral hazard as the bank bailouts because all you have done is simply lowered the cost to individuals of bearing these pitfalls – and lowered cost leads to a swelled demand. If you pay people when they get sick, there will be more sickness; if you pay people when they are unemployed there will be more unemployment; if you pay people when they have children people will produce more children that need a roof and need feeding. The welfare state is not the solution to the problems it seeks to resolve; it is, rather, a fertiliser for their growth and proliferation, just as bank bailouts are a fertiliser for the growth of credit expansion, malinvestment and repeated boom and bust cycles.

The second argument against bank bailouts, related to the one we just outlined, is that it shoves the cost of the bad decisions of the bankers onto the shoulders of everybody else. Yet isn’t this precisely what the welfare state does? Welfare statists imagine that nearly every unfortunate circumstance in which people find themselves is not the product of their own making and that they are therefore blameless and should be (patronisingly) pitied – in short, that people do not bear any responsibility for their own circumstances. However, this is not the case with many of the issues that the welfare state attempts to address. As was argued in a previous essay on universal healthcare, the majority of medical ailments from which people suffer are not the unfortunate result of a random, illness lottery but are, rather, directly related to their environment and lifestyle – particularly diet, exercise and consumption of alcohol, tobacco and narcotics. If, therefore, people choose to pursue a lifestyle of eating gluttonously, exercising little and smoking and drinking heavily with this resulting in sickness, then if the government picks up the tab this simply forces the cost of these bad decisions onto everyone else. People, in most cases, choose to have children, or at least to engage in the intercourse that results in children – it isn’t a random, spontaneous event that appears out of nowhere to inflict itself upon people’s lifestyles. To the extent, therefore, that people cannot afford to raise these children properly and the government intervenes then the cost of other people’s bad decisions is again shovelled onto the shoulders of everybody else. But even those aspects of the welfare state that are not necessarily the fault of the individuals concerned – such as unemployment – is usually the result of government anyway. Low employability is caused not only by inadequate state education, but also government interference in the labour market such as minimum wages and excessive regulations that cause the cost of employment to exceed that of the productivity of the lowest skilled workers. Why, therefore, do welfare statists propose a government solution to what is a government created problem? Why not just get rid of the government created problem?

The third argument against bank bailouts is that they perpetuate what we might call a crony “corp-tocracy” where taxpayers’ money is siphoned off into the hands of the government’s favoured millionaire chums. Yet this is precisely the result of the welfare state also. Although the nominal beneficiaries of the welfare state are individual people, someone has to be paid in order to carry out the work of the welfare state. Not only does a welfare state require the creation and sustenance of a vast, leeching bureaucracy to administer it all but particular parts of the welfare state have to be contracted out to individual specialists. For example, public housing schemes need to find construction companies, hospitals need to find doctors and they need to purchase medicines from drug companies. The interests of these suppliers to the welfare state is to ensure that their compensation for carrying out their tasks is as high as possible; indeed, one of the reasons why the welfare state is such a burgeoning expense is because the disconnect between the consumer that pays and the supplier that is paid results in spiralling costs for the services of the latter, with the result that the majority of welfare spending goes not to the individual people but straight into the bank accounts of large corporations and contractors. Moreover, the welfare state is not usually a fixed pool of services that are provided by the government, but includes also private organisations and charities that lobby the government for money in order to solve the particular societal “problems” and grievances that they happen to have identified. Much of this money is simply wasted, as suggested by the recent collapse of Kids Company, a UK children’s charity, around a week after it received a £3 million grant from the government. Indeed, in the UK – when the chief executives of high profile charities are paid six figure salaries and they have been chastised for “aggressive” funding raising strategies that were recently attributed, at least in part, to the death of a pensioner – the substantive difference between a charity on the one hand and a corporation on the other is becoming increasingly questioned.

The fourth argument against bank bailouts is that they distort the economy, shovelling excess funding into the financial services sector and expanding their profits at the expense of other industries. Again, nothing about this is untrue and, indeed, as “Austrian” economists we would make an even more detailed case about how the resulting credit expansion distorts the consumption/investment ratio in order to result in unsustainable malinvestments across the entire economy. Yet the welfare state distorts the economy also, only in a more incremental and pacing manner. In the first place, the increased incentive caused by the welfare state to exacerbate the very problems it is supposed to solve, such as sickness and unemployment, reduces the capacity of the labour market and thus shrinks the extent of the division of labour that would otherwise have been possible. Second, the burgeoning cost of the welfare state caused by an artificially inflated demand for welfare requires more and more resources to be confiscated by the government in order to fund it. Thus, the areas of the economy that are devoted to providing welfare are swollen at the expense of other areas of the economy which must correspondingly shrink. Third, this is compounded by the fact that a large, government pot of gold encourages rent seeking behaviour, which in the case of welfare means (as we stated above) large numbers of special interest groups lobby the government each with a claim that they have identified some societal affliction that is ripe for resolution by government spending. Governments are eager to attract this kind of attention for more government spending means not only more power and prestige but also provides another outlet with which to bribe citizens with their own money when making election “promises”. The result of this, again, is that the total portion of the economy that is devoted to welfare spending is artificially inflated compared to what consumers would otherwise prefer.

The final argument against bank bailouts that we will consider is that they create a feeling of bitterness and resentment in the general population, a fissure of hate, contempt and distrust between the bankers and the people whom they supposedly serve. Again, all of this is true. However, it applies just as readily to the welfare state. Its proponents usually justify the imposition of the welfare state by stating that it is morally good for us to care and look after one another as if we are all one big family. This may be true enough, but the welfare state does not create that situation. In order to become a morally better person I have to choose to care and to look after my fellow man – I have to decide to do it voluntarily. I am looked upon with admiration because in spite of all of the personal luxuries I could have spent my money on, I willingly deprived myself of them and was happy to give the money to a person in need. The welfare state, however, does not give me any choice in this regard – it just forces me to do it regardless of what I want. The action, therefore, is not as the result of any personal sympathy or empathy for the plight of the less fortunate, nor of any aspiration to moral heights. Instead, the void left by an absence of sympathy and empathy is likely to be filled by bitterness and resentment as my hard earned money has just been confiscated from me to go to people who I believe may not deserve it, particularly if it goes to some cause that I may disagree qualifies for welfare spending (such as breast enhancement surgery on the NHS or unemployment benefits to those who are just workshy). The welfare state therefore creates the opposite of any charitable feeling whatsoever and destroys any notion of brotherhood or family. When this is coupled with the welfare state’s encouragement of the afflictions it seeks to solve then the result is a society with a lower, rather than higher, moral standing. This is exacerbated by the interdependent relationship between bank bailouts on the one hand and the welfare state on the other. Bank bailouts mean that the banks take the money of the taxpaying public and plough it into assets so that the income of anyone who owns these assets – i.e. the bankers themselves – is swollen while the incomes of those who do not stagnates. The resulting price inflation lifts the affordability of assets such as houses and basic necessities, such as food, out of the grasp of those on low incomes. The consequence is another artificially swollen demand for welfare to give ordinary people somewhere to live and something to eat. Thus, the poorest in society demand increased taxes on the rich – i.e. the very bankers who were bailed out – in order to fund increased welfare spending. The result, therefore, is a toing and froing of mutual theft, a circle of robbery where bankers demand taxpayers’ money to continue their casino operations, after which everyone else demands some of it back to ameliorate the resulting effects. Far from being a moral and harmonious society all we end up with is hating each other and trying to grab whatever we can out of each other’s pockets.

What we can see from this brief comparison of the welfare state to bank bailouts, therefore, is that there is very little qualitative difference between the two and that the arguments that are used to oppose bank bailouts apply just as easily to the welfare state. The amelioration of welfare demand is achieved not through the redistribution of a fixed pool wealth but through the raising of real incomes by increasing the productive output per person. In order to achieve this we need to eliminate both the bank bailouts and the welfare state so that we can return to a genuine economy where everyone serves each other rather than engages in mutual plunder. The rich would have to earn their wealth by directing and increasing the productive capacity of the economy to best meet the needs of the consumer; the poor earn their money by providing the labour to bring about this direction, with their wages being able to buy more and more goods as a result of the increased output. Not only would this create a more prosperous society where poverty has truly been consigned to the history books, but the vanquishing of hatred, resentment and antagonism would create a morally superior one too.

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Universal Healthcare

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“Universal healthcare”, that is an alleged “right” to “healthcare” provided in some form by the Government, seems to be a mainstay in social democratic thought. So much so, in fact, that the UK’s NHS is taken as a given, with any kind of proposed healthcare reform couched in terms of improving “our” Government-funded health service rather than ever considering whether it should exist in the first place.

However the consequences of socialising medicine are grave indeed, including spiralling costs and ever increasing numbers of sick – pretty much the effects of the welfare state in general. This is without even considering the ethics of forcibly confiscating the money of one person to benefit another, although this essay will focus on the economic aspects of what is, in effect, the socialisation of medicine.

Why Healthcare?

A preliminary question to raise is that if healthcare should be provided by Government then why shouldn’t everything else? If Government can work such wonders in the health industry then why don’t we spread this unfettered glory to all areas of the economy? Contrary to what seems to be mainstream opinion there is nothing special about healthcare. Good health and treatment for diseases, accidents and the likes are ends like any other. There is a finite number of resources with which to meet these ends and the ends must compete with other ends that individuals hold dear. There could be little point in having a first class health service if, to pay for it, you cannot afford any roads, shops, schools, etc. No one gives up all their possessions to buy a Ferrari. So how are these scarce means to be allocated? The choice is between two possible options – either through voluntary trade which leads to the allocation of resources through the pricing, profit and loss system; or through Government diktat where resources are directed by the will of bureaucrats.

This is not the place to raise and discuss such important facts as the impossibility of the rational allocation of resources under a fully socialised economy, nor the lack of incentives which necessitate the creation of a climate of force and fear in order for production to continue. But for anyone who believes that healthcare should be socialised, does he/she additionally believe that everything else should be run by the Government also? If direction of resources by a central body is good enough for healthcare why is it not for the rest of the economy? All of the arguments that apply to “free” and “universal” healthcare just could just as easily be applied to anything else. Why not “free food” or “free televisions” or “free football tickets”? And if the budding healthcare socialiser does not take this position then why not?

This issue aside, however, let us proceed to examining the effects of providing “universal” healthcare. To be clear the definition of universal healthcare we shall consider for this essay is that the cost of treating medical conditions shall be borne (in some way) by the State, i.e. the taxpayer. Healthcare costs are not, therefore, paid for or borne by the sick individual at the point of need. Different jurisdictions have enacted this in different ways and to difference degrees but the principle is the same.

Non-contributory Demand for Life-Saving Treatment

The typical justification for universal healthcare runs something like this: a person, through no fault of his own becomes terminally ill. Treatment is so expensive that this person cannot afford to be cured and so has to die. Such a situation is intolerable in a modern society. So enacting universal, Government-provided healthcare will mean that anyone that gets sick can be treated, however rich or however poor.

This emotive image of why universal healthcare is apparently needed is so engrained in the popular psyche that it is almost always the first line of rebuttal to any questioning of the concept. However even if this type of medical need was prevalent (which it is not, as we shall see below) there is no justification for the Government to step in and solve it. If we elaborate the key assumptions as follows:

  • That no individual has any participation in causing his medical need (or at least that any contribution can be mitigated);
  • That the medical need is expensive as judged by the individual’s means; and
  • It is not possible to state in advance precisely who will require this treatment;

then the Government has done nothing more than enacted a compulsory insurance scheme. People are forced to pay into the system through their taxes and only if they suffer from any illness do they receive any benefit out of it. But why must the Government provide this? Why must everyone be forced into a one-size-fits-all system? Why can’t private insurers, tailoring healthcare packages to a range of needs and suitabilities, do this by attracting customers voluntarily?

A typical rebuttal of this would proceed along the lines of looking at the height of healthcare insurance premiums in the US. The reason why this is a fallacious example will be discussed below. Here we will deal with one concern – that of higher premiums for those more likely to become ill through, say, genetic disposition or for any reason for which the individual concerned cannot be held responsible. Is it not unfair for this person to have to pay higher premiums? It’s not his fault that he is lumbered with this greater risk so why should he pay more? The obvious answer is that while his risk of incurring illness is not his fault it is also not the fault of anyone else either. Why is just to force everyone else to pay for it but not the person himself? It is indeed unfortunate that the individual concerned is prepossessed with a greater likelihood of illness but why should everybody else be forced to bear this burden? If X has something that Y needs is X (or X’s “representatives” in the form of the Government) able to just take it? Or does it just apply to healthcare? After all everyone finds themselves in situations which are not anyone else’s fault but render them in a less fortunate position than another individual. So what if X bears costs that he cannot help in some walk of life other than healthcare? Why should Y be privileged purely because his faultless needs are medical rather than in something else?1

Against the argument that helping one’s “fellow” human being promotes goodness and morality, this only true if one voluntarily donates funds to help the sick. A moral action has to have been chosen, otherwise it is just a plain action, bestowing neither merit nor condemnation on the donor. Leaves display neither morally good nor morally bad behaviour when they blow in the wind. If you reduce human action to that of dead matter purely controlled by external events then morality of that action is an empty consideration. If anything forced charity is likely to begat bitterness and hatred as other people benefit from one’s hard earned money against your own wishes.

Contributory Demand for Life-Saving Treatment

There is therefore no justification for forcing people to pay into a system merely because they might get ill through no fault of their own. However, it becomes almost unnecessary to elaborate this further when we see that a vast proportion of the demand for life-saving medical treatment consists of needs that are generated by at least some kind of contribution from the would-be patient himself. That is that the individual’s lifestyle has in someway caused, contributed to or aggravated a need for life-saving care.

In 2010 there were 494 242 deaths in the UK. Of these the primary causes were:

  • Cancers and Neoplasms – 141 446 (29%);
  • Heart or Circulatory Diseases – 158 084 (32%);
  • Respiratory Diseases – 67 276 (14%).2

Together these three causes accounted for 74% of all deaths in the UK. Worse, they do not include all of the patients who were diagnosed and have either been cured, are in a process of treatment or otherwise have their illnesses under control. Looking at these latter figures for the UK we find that heart failure accounts for 5% of all hospital admissions3 and that, in 2011, there were 309 527 new cancer diagnoses4. Yet how are these illnesses caused? Only 5-10% of the cancer diagnoses are attributed to genetic defects while a whopping 90-95% are attributed to lifestyle and environment, including smoking, drinking, poor diet, obesity and lack of physical exercise5. Heart disease, the biggest killer in the list above (and also worldwide), is nearly always caused by an individual’s lifestyle, pretty much the same factors as for cancer. Indeed lifestyle changes are the primary target for initial treatment6. And respiratory diseases, taking a distant 3rd place in the list, have the same major lifestyle inputs7.

Therefore the largest causes of death in the UK are those that are attributed to the lifestyle and/or the environment of the individual. A person has a very large element of choice as to whether he will pursue a style of living that will or is likely to make him in need of life-saving medical treatment. It seems unlikely that the architects of universal healthcare, past and present, took or take this fact into account. For whether one pursues a course of action or not depends much on its costs versus its benefits. These elements cannot be raised or lowered without precipitating a change in people’s behaviour, all else being equal. People will do more of something if the cost is lower relative to its benefit than if costs are higher relative to its benefit. In short, increasing costs reduces demand and lowering costs swells demand.

When people, therefore, have to face the costs of their own choices the result is that these costs will be accounted for in their action. In a world without universal healthcare if someone does something that will result in life-threatening illness then this person risks having to pay the full cost for their medical treatment8. The result is a very strong disincentive to the pursuit of lifestyles that will result in the need for such treatment. Further to the extent that preventative treatments (including choices such as diet, exercise, etc.) are less costly than remedial treatments there will be greater expenditure on the former as a method of protecting against having to pay for the latter at some point in the future.

However if the cost of remedial life-saving treatment through universal healthcare is reduced to either a very low level to the individual or is removed entirely then precisely what has happened? The cost relative to the benefit of pursuing lifestyles that lead to ill health is lowered. Pursuing such a lifestyle therefore becomes a significantly more attractive proposition. The individual might still be paying through his taxes or through some kind of compulsory insurance scheme but the key difference is that his payment is now separated from his behaviour. Whereas before he only paid if he actually got sick now he has to pay regardless and the amount he pays bears no relation to precisely how many medical services his illness may demand. In short, you can get as sick as you like and you will not pay a penny more or less for your treatment. There will still be costs, of course; illness will still cause pain, interruptions to the normal course of living, and, of course, the possibility or likelihood of death and these elements will still weigh as psychic costs in the mind of the acting individual. The key point, though, is that relatively costs have decreased and relatively pursuing lifestyles that will result in sickness are more attractive.

This is brought into sharper focus when we realise that the cost of preventative treatment is not covered by universal healthcare. Universal healthcare promises to treat you if you get sick but the costs of stopping yourself from getting sick in the first place still have to be borne by the individual. Relatively, therefore, preventing illness has become more costly relative to treating it. There will therefore be less prevention of illnesses, all else being equal, and thus more illness9. The overall result will be an increase in the demand for the treatment of illnesses as the now relatively lower cost of treatment versus the relatively higher cost of prevention causes people to pursue lifestyles that are more likely to lead to illness. Obesity rates, for example (which itself is dependent upon the major lifestyle choices of diet and physical exercise) have ballooned in the last half-century with 2007 rates, according to the WHO, standing at anywhere between 61% and 74% for the UK, US, Canada, Australia and New Zealand10. In the US, the country with the world’s highest standard of living, obesity rates have increased for all population groups over the last few decades11.

Indeed, since the appearance of universal healthcare more than half a century ago, there has been a general shift in the healthcare industry from being one of preventative medicine to being one of remedial medicine, furnishing treatments that don’t often attack the root of the problem but rather try to control symptoms. In the ten years to 2008, the percentage of Americans taking at least one prescription drug increased from 44% to 48%; the use of two or more drugs increased from 25% to 31%, while the use of five or more drugs increased from 6% to 11%. That’s a total of 90% of Americans taking at least one prescription drug in a country with an increasing obesity rate and with a current obesity rate that tops the list for the English-speaking world. In short, the Western world is populated by fat, pill-popping invalids12.

But it gets worse than that. We mentioned above that one of the great fears of getting sick was the unbearable cost. But an increase in demand leads to an increase in costs, all else being equal. Healthcare is so unaffordable not in spite of the fact that people get sick but because the very system is inducing people to demand more and more of it. What else do you expect when you do the equivalent of paying people to get sick?13 Between 1997 and 2009, total healthcare spending in the UK rose from £54.8 billion to £136.4 billion, an average annual percentage increase of 7.9%. As a proportion of GDP healthcare expenditure rose half as much again, increasing from 6.6% to 9.8%14.

Further, not all of the need for life-saving treatment takes the form of an illness. The treatment of accidents and injuries also needs to be considered. On the face of it such incidents appear to be not necessarily blameworthy, freak happenings for which no one can be held responsible. However people are, to a degree, responsible for the conditions out of which accidents arise – conditions that prove injurious or fatal when combined with carelessness or absent-mindedness. In a world where one has to bear the costs of his own healthcare an individual would be ever-alert to reducing the possibility of accidents arising. The conditions for them to occur would therefore be substantially reduced. With universal healthcare, however, where the cost of remedial medical attention is reduced to zero, it suddenly becomes more costly to take this preventative action. All else being equal, therefore, there will be more hazardous situations that arise and hence more accidents. Not only will people carry out more dangerous or “thrilling” activities but the safety features introduced to regular activities will be minimised compared to what they otherwise would be. It is because of this that safety standards appear not voluntarily through market transactions but are arbitrarily imposed by Government fiat as numerous rules and regulations that hamper the activities of businesses and individuals before they can even draw a breath15. The overall result can only be increased demand for healthcare and hence spiralling costs.

Non-urgent and non-life threatening need for medical care

Above we have considered only the most serious of medical needs. Before leaving the demand side of universal healthcare we should also consider the less serious, minor ailments from which people suffer. If people do not have to bear any cost for medical care there is an increased tendency to use it when no treatment at all is required or when a lesser degree of attention would resolve the ailment. The NHS’s “Choose Well” campaign, launched in response to the heavy burden placed on underpriced (i.e. free) healthcare facilities, publishes a list of figures that is worth quoting in full:

  • 51.4m GP consultations are for minor ailments alone, which would clear up by themselves, or with a little help from an over-the-counter remedy; this is 18 per cent of the GP workload;
  • Nearly half of these consultations are generated by people aged 16 – 59 years;
  • Up to 40,000 GP visits per year are for dandruff; 20,000 go to their local surgery for travel-sickness and 5.2 million with blocked nose;
  • Since 2005/6, the number of First Attendances at A&E has gone up from 17,775,225 to 20,717,197 in 2010/11 (16.5 per cent);
  • Two million people who go to A&E could either self-care or have been treated elsewhere in the community;
  • 12 percent of people admit to having used A&E in the past even when they knew there was nothing seriously wrong with them;
  • The estimated cost of treating people who go to A&E but who could have either self-treated or gone else where, is £136 million a year. This is the equivalent cost of 6,500 nurses.16 

In addition to these figures, 40% of A&E visits are related to intoxication from alcohol17. Does anyone deny that if some kind of cost was applied to the use of medical facilities that all of these numbers would not fall dramatically? And would people readily drink to a injurious level of intoxication if they had to pay for the resulting problems to be treated? The very reason that is cited for the alleged necessity of universal healthcare is that private healthcare is unaffordable, and yet it is the very system of universal healthcare itself that causes and perpetuates the extraordinarily high cost through an uncontrollably inflated demand.

Alternative Rationing of Healthcare Facilities

Perhaps the most sorry tale of universal healthcare is that it isn’t “universal” at all. The additional demand leading to spiralling costs puts pressure on resources meaning that not everyone who demands them is able to receive them at the point of need. The result, in the absence of consumer prices, is that the Government pursues alternative methods of rationing. The most egregious example of this is the infamous NHS waiting list, where instead of having to pay in money you instead have to pay in time and wait for resources to become available for you. What has been gained in having the service provided for free is the pain and agony of having to wait for treatment (which may never come if you happen to die in the meantime). With the free market if you are willing and able to pay for your treatment you at least have the option of getting it there and then and the treatment would be far more affordable than it is under universal healthcare.

Further non-market rationing is the decision of health authorities not to fund certain treatments. A drug could be tried, tested and approved but the particular healthcare authority decides that it is not “worth” funding the drug based on aggregate statistical studies rather than what is suitable for the particular patient. Such a decision can quite literally be a death sentence to someone with a terminal illness and is the source of the feared “death panels” in the US under the Patient Protection and Affordable Care Act, colloquially known as “Obamacare”. Whether you live or die, therefore, depends entirely on precisely what you happen to be suffering from and the precise treatment that is required, not on your willingness to voluntarily contract for the specific services that you need from your healthcare provider. More on the pricing and rationing of drugs will be discussed imminently as we turn now to the supply side of the healthcare industry.

Government as Consumer and Provider

Under a normal, free market in healthcare, the patient would pay his doctor for services that they contract to be rendered. The patient’s appetite for healthcare will be tempered by what he is willing to pay for – none of those 999 calls for blocked noses or headaches – yet the doctor will also be keen to keep the cost of potential treatments low so his services remain affordable and competitive. This, in turn, is imputed back to the manufacturers of treatments who will lose custom if they produce drugs that are too expensive, ineffective or even dangerous. What results is a host of affordable treatments that are suited to the needs of the individual patient.

Under universal healthcare, however, this relationship is severed. Patients, as we have already stated, are now in the position of having an inflated demand for healthcare, their money having been confiscated by the Government regardless of the patient’s need. Patients no longer care about price as this is not borne by them individually but by the multitude of taxpayers. However the revenue from healthcare provision still disappears into private hands, those of doctors and treatment providers such as drug manufacturers. Having been shorn of the discipline to keep prices low, maximising their revenues and profits becomes far easier. There will therefore be more of an incentive to maximise rather than minimise the cost of the services that are provided. Again the result is rising prices. In the middle of the patient and supplier sits the Government holding the cash. Not only is Government, to a large degree, less responsible with funds than with its original owners (all losses and increasing and expenses can simply be borne by higher taxes, borrowing or inflation, made easier by the relatively short terms of office that prevail in a democracy18). But also as Government bureaucrats are not the end users of the treatments that are produced there is no way for them to determine whether certain treatments or courses of action are worth spending their funds on. Instead of the voluntary relationship between a patient and his doctor tailoring the appropriate needs suitable to the individual patient the Government must take refuge in aggregate scientific studies concerning the treatment’s effectiveness and make a purchasing decision accordingly19. But the drug companies themselves are the ultimate experts in the science of treatment whereas the Government and its regulators are not. Shorn of any personal experience of treatment benefits the Government has to rely on the science that the healthcare suppliers churn out and there is every incentive for the latter to proceed down the route of ensuring that this science results in products that are more expensive than they would be on the free market. The result is a cosy relationship between the Government and the largest pharmaceutical providers that results in a stifling of competition for medical services. Indeed, as soon as someone outside of the pharmaceutical lobby appears with a treatment that threatens the profits of the big drug companies everything is done to discredit them, as can be witnessed from the endless harassment of The Burzynski Clinic and its heterodox approach to treating cancer. In short, all patients regardless of what is personally effective and preferable for them are forced to accept expensive laboratory-concocted medicines and procedures from “Big Pharma” that just happen to have received the sanctifying blessing of the Government20. But this is not all because the Government’s own incentive structure serves only to make treatments more expensive21. Private providers of healthcare services on a free market would have every incentive to ensure that affordable and effective treatments are brought to market as soon as possible. If they do not they risk losing business to competitors who are able to do so. To put it bluntly a doctor whose patients all die will lose customers to other doctors who can treat them. When the Government, however, is the sole provider and its services are funded by taxes it never faces the possibility of losing customers or revenue if it fails to perform. The speed with which new treatments are brought to use is therefore diminished and, in fact, there is every incentive to perpetuate endless rounds of testing in the name of “value for money” and “safety”. If someone dies because the Government has not brought a treatment to market it can readily be blamed on the illness itself, with future patients unable to take their custom to more able healthcare providers as a result of this failure. If, however, the Government approves a drug and it turns out to be ineffectual or, worse, actually hastens illness and death, then there is not only negative political publicity but also the individual politicians and bureaucrats themselves stake their own livelihoods on a drug approval. The result, therefore, are endless and unnecessary rounds of testing to make absolutely and devastatingly “sure” that drugs work and are safe, all of which adds to the already inflated cost and casually allows would-be beneficiaries to die because a life-saving drug is held up in regulatory approval for no other reason than saving the skin of some faceless bureaucrat22 23.

Additional Effects on the Demand and Supply Side of Healthcare

There are further effects that the distortion of incentives causes to both the demand and the supply side of the healthcare industry. One is an ever-increasing scope of precisely what constitutes a treatable illness. Addressing one’s own personal weaknesses and failings is a costly business but, lo and behold, if you can suddenly have it defined as a treatable illness or condition one is absolved of all blame and responsibility for the said condition and a plethora of free treatment is offered in its place. Conveniently enough the suppliers, promised a gargantuan amount of Government money if they can treat these “problems”, are eager to step in. This has been particularly true in areas such as psychological or mental disorders, possession of which formerly meant that one was simply bone idle, sociopathic, or – shock, horror – just not a very nice person. It is not within the scope of this essay to determine whether such apparent disorders are genuine and treatable but one has to view with suspicion whether their increased proliferation is due to honest developments in medical understanding or whether it is simply a ruse to relieve individuals of the responsibility for their odious personalities and bad behaviour while lining the pockets of the supposed treatment providers.

Indeed their is a distinct selectivity in classifying psychological issues as treatable conditions and it seems that someone is only possessive of a “disorder” if it has negative effects. But what if the effects are overwhelmingly positive? A person who has immense powers of concentration is as deviant from the norm as someone who cannot concentrate at all, yet we call him “talented” rather than “disordered”; a person who showers his friends with gifts and strangers with extreme courteousness steers as much away from typical behaviour as one that loots and assaults, except that we call him “generous” or “friendly”. Shouldn’t, if we were consistent, also treat these people for having disordered minds, or indeed, any person with a mind that steers from the average and dull?

The Case of the United States

It is typically asserted that the high costs of the healthcare system in the United States plus its allegedly grievous inequalities are a strong argument against any free market in healthcare. The only problem with this is that the US does not have a free market in healthcare.

In the first place there is Medicare and Medicaid which are state funded health insurance programmes for the elderly and the poor respectively24. The effects of these upon demand for healthcare will be fully inline with our analysis above, with both programmes forming the lion’s share of the US governments titanic unfunded liabilities, estimated at anywhere between $50 and $100 trillion in present value.

The second big problem is the whole boondoggle of insurance. The majority of the population under 65 is insured for healthcare by their employer, a sorry legacy of the Great Depression. Even Medicare and Medicaid are insurance based social welfare programmes. This has caused two problems. First, insurance, as we noted above, only works for events over which the insured has either no or a mitigated degree of control. If, however, there are events over which the insured does have control then it simply becomes a carte blanche to carry out these activities. Healthcare demand and, therefore, healthcare premiums have to rise to cover the inflated costs. The Government pours fuel on the fire by legislating to prevent insurers from excluding certain medical needs from coverage. Insurance businesses are effectively being told that whenever one of their customers voluntarily does X activity they must, in turn, fork out $Y. Who would ever want to enter a contract such as that? The only result can be a greater incidence of these medical needs and, consequently, that insurance premiums have to rise, driving them into levels of un-affordability. Even more costs are then heaped on top for administering the whole machine. Rather than simply being able to take cash from the patient, individual doctors have to go through lengthy and bureaucratic administrative processes to claim their fees from the patient’s insurance provider. It’s the equivalent of a shopkeeper having to fill in forms and send them away simply to get paid for selling you a newspaper. At least with other forms of socialised medicine such as the UK’s NHS the money just comes from a single, big pot.

Another problem is the whole issue of Government licensing and restriction. The effects of drug regulation by the FDA are as we set out above. But Government interference in the supply side of healthcare dates back to before World War I when the Flexner Report was published, having an enormous impact on the training of physicians that exists to this day. Dressed up, as always, as a concern for the consumer and standards, the result was to vastly restrict the number of people who could and do practise medicine. Murray Rothbard sums it up succinctly:

Flexner’s report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.

The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, “allopathic” medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.

Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors’ incomes. In all cases of cartels, the producers are able to replace consumers in their seats of power, and accordingly the medical establishment was now able to put competing therapies (e.g., homeopathy) out of business; to remove disliked competing groups from the supply of physicians (blacks, women, Jews); and to replace proprietary medical schools financed by student fees with university-based schools run by the faculty, and subsidized by foundations and wealthy donors25.

Finally, we may also mention the burdensome and expensive cost of medical malpractice insurance and litigation. Not only do these impose direct costs upon healthcare supply, but doctors and physicians may also practise “defensive medicine”, ordering swathes of unnecessary tests on a single patient just to eliminate any chance of being subjected to a malpractice lawsuit, swelling demand for medical supplies and thus raising prices.

Reviewing this record renders it impossible to view the US healthcare system as bearing any kind of resemblance to a free market.

What Should be Done?

The most cogent, succinct and principled programme for restoring an efficient and affordable healthcare system is the four steps outlined by Hans Hermann Hoppe26. Adapting and adding to this for socialised medical systems in general:

  • Private, voluntary insurance programmes should cover medical needs over which the individual has no control;
  • Needs over which the individual has control should be paid for by that individual; prevention will therefore become more attractive than cure and medical costs will decline; people would lead stronger and healthier lives;
  • Eliminate Government licensing and restriction of doctors and treatments, increasing their supply and allowing patients to determine precisely who they want to be treated by and how;
  • Restore the role of private charity and mutual organisations in providing assistance to the less well-off27. To the cries of letting the fortunes of the poor sick be subject to the vagaries of private charity, the latter is already the only route if the Government healthcare system refuses to fund a treatment because the cost isn’t “justified”. As we noted earlier giving voluntarily is also a moral good whereas being compulsorily deprived of your funds for enforced charity engenders bitterness towards and hatred of those in need.

This is the only way if anyone in the future is to enjoy an efficient, affordable and ethical healthcare service.

1To elaborate private health insurance would operate by categorising policyholders into definable classes, a class being a category of persons sharing a common characteristic. Of those in this class it must be possible for the risk of diagnosis of the insured event (i.e. the illness) to be quantified. A simple classification and quantification of an event would be “this year 1% of all men will be diagnosed with cancer”. By knowing the costs of medical care and the number of people who will require it the insurer is able to set the premium rate. It follows that if one class is at a greater risk of acquiring an illness than another class then the premiums for the latter will be lower. The most successful insurance operation is one that defines its classes and its resulting qualifications very precisely as those in less risky classes can be offered lower, more competitive premiums. It is these nuances of classification that are objected to as they are not the fault of the individual. The point we are offering in rebuttal here is that they are not the fault of anyone else either so this is no basis for everyone else to have to pay for the individual’s healthcare needs.

2Office for National Statistics, Statistical Bulletin, Deaths registered in England and Wales in 2010, by cause, 28th October 2011.

3Dr Rob Hicks, Heart Failure, BBC Health.

4Cancer Research UK, Cancer in the UK: December 2011.

5Anand P, Kunnumakkara AB, Kunnumakara AB, Sundaram C, Harikumar KB, Tharakan ST, Lai OS, Sung B, Aggarwal BB, Cancer is a preventable disease that requires major lifestyle changes, Pharm. Res. 25 (9): 2097–116.

6Ornish, Dean, “et al.”, Can lifestyle changes reverse coronary heart disease? The Lifestyle Heart Trial, Lancet 336 (8708): 129-33, doi:10, 1016/0140-6736(90)91656-U, PMID 1973470; Ornish, D., Scherwitz, L. W., Doody, R. S., Kesten, D., McLanahan, S. M., Brown, S. E. “et al.”, Effects of stress management training and dietary changes in treating ischemic heart disease, JAMA 249 (54), 54.doi:10.1001/jama.249.1.54, PMID 6336794; Ornish, D., Scherwitz, L. W., Billings, J. H., Brown, S. E., Gould, K. L., Merritt, T. A. “et al.”, Intensive lifestyle changes for reversal of coronary heart disease, JAMA 280(23): 2001–7, doi:10.1001/jama.280.23.2001, PMID 9863851.

7WHO, Global Surveillance, prevention and control of chronic respiratory diseases: a comprehensive approach, p. 37.

8Insurance would be useless in this scenario as it is impossible to insure against events over which the insured has control, unless this control can be rendered obsolete and a risk of the insured event not dependent upon control still remains

9As a general rule prevention of illnesses is costly even if only psychically. There is always a degree of discipline required in the abstinence from or moderation of certain harmful but pleasurable pastimes such as smoking, drinking, taking recreational drugs, etc. and in sticking to a diet and exercise regimen.

10Lauren Streib, World’s Fattest Countries, 8th February 2007, Forbes.

11Blackburn, G L; Walker, W A, Science-based solutions to obesity: What are the roles of academia, government, industry, and health care?, The American Journal of Clinical Nutrition (American Society for Clinical Nutrition) 82 (1): 207–210, PMID 16002821.

12Qiuping Gu; Charles F Dillon; Vicki l Burt, Prescription Drug Use Continues to Increase: U.S. Prescription Drug Data for 2007–2008, NCHS Data Brief No. 42 September 2010.

13We might add that recently jurisdictions have started targeting prevention as a result of their own spiralling costs. However these often take the form of paternalistic and invasive intrusions into people’s lifestyles such as bans and prescriptions of certain types of behaviour – we might mention the recent smoking ban and the suggested minimum price for alcohol in the UK as examples, classic cases of one Government intervention arising because of the consequences of another. If healthcare wasn’t universal not only would unhealthy lifestyles be curbed but people would still have the freedom to pursue and enjoy them provided that they were prepared to pay for the consequences.

14Uma Qaiser, Expenditure on Healthcare in the UK, May 2011, Office for National Statistics.

15Safety is an end just like any other in that it consumes scarce resources. There is no objective standard of safety but rather each person must decide how much of his resources he is willing to devote to safety at the expense of other ends. Every pursuit of safety is a resource denied to another end. Wealthier societies will therefore be able to afford more safety. A safe car, for example, would be one that is built like a tank yet it would cost so much that no one would be able to afford it nor would it probably go very fast. People have decided, in this instance, that the end of being able to afford a car that gets them to where they want to go quickly is worth pursuing ahead of the safety offered by a tank-like car. Because of universal healthcare the voluntary trade of safety standards is skewered, allowing more accidents to arise then there otherwise would. The resulting Government imposition of standards must necessarily be arbitrary and is unable to calculate where the trade-off between the pursuit of safety and other ends should be. The Government could, for instance, legislate that all cars should be built like tanks in the name of “protecting people from road accidents”, but the resulting loss of productivity from the unaffordability of the vehicles produced would be enormous.

16www.northwest.nhs.uk/yournhs/choosewellthiswinter/

17TNT Magazine, Crazy A&E visits revealed in Christmas hospital warning, 12 Dec 2011.

18For an elaboration of how the stewardship of a nation’s resources under democracy increases their squandering, see Hans Hermann Hoppe, On Time Preference, Government, and the Process of Decivilization, Ch. 1 in Democracy, The God that Failed.

19Roberts Higgs, The US Food and Drug Administration – A Billy Club is not a Substitute for Eye Glasses, Ch. 9 in Against Leviathan, p. 59 highlights the relative ineffectiveness of such testing: “Largely because of the differences among patients in their physiological responses and their psychological inclination to accept various trade-offs, the typical medical product produces a range of expected outcomes among its users. No amount of pre-market testing can eliminate such uncertainties.” The remainder of this chapter is a brilliant survey of the disastrous and deadly consequences resulting from the dictatorial stifling of diversity and perverse incentives of Government regulated medicine.

20We are not, of course, endorsing treatments such as those offered by the Burzynski Clinic nor are we necessarily condemning the drugs that are produced by the large pharmaceutical companies. Our point is that under universal healthcare the needs and desires of the individual patient are necessarily supplanted by the profit motive of healthcare providers. Burzynski’s treatment may well be ineffective for the most part, but this is for the individual patient to decide, not a swathe of Government bureaucrats in the pockets of “Big Pharma”.

21A commonly held fallacy is that anyone who works in private industry is automatically interested in their own gain at the “expense” of others whereas anyone who enters the public arena is a selfless altruistic angel who is suddenly devoid of all human desires and incentives. Perhaps to swallow the fleecing nature of the state people willingly mask the truth in their minds that Government officials are just as human as everyone else.

22Higgs, pp. 61-2.

23This is not to suggest, of course, that efficacy and safety would never be considered on the free market. Far from it. The important aspect to stress, however, is that there has to come a point where testing must stop and the drug is either abandoned or is offered for sale. On the free market precisely where this point lies will, again, be determined by how much consumers are willing to spend on safety. What is being demonstrated here is that the incentive structure of Government is likely to increase the testing and experimental process beyond what would be seen on the free market and, hence, increase costs.

24One of the myths of the US healthcare system is that if you are poor you cannot afford healthcare. This is not true; it is the middle income earners who cannot afford health insurance and who do not qualify for either of these two programmes who have difficulty accessing healthcare.

25Murray N Rothbard, Government Medical “Insurance”, Ch. 20 in Making Economic Sense, pp. 76-7.

26Hans Hermann Hoppe, A Four-step Health-care Solution, No, 4 in The Free Market, Volume 11, April 1993.

27Mutuals were once the mainstay of providing relief but have been rendered almost obsolete since the advent of universal healthcare. It is ironic that the supporters of mutual and co-operative organisations are of the ideological left and, hence, supporters of the welfare state as it is the latter than has driven mutuals to the fringe of economic relevance.

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Social Democracy

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The author responded to a lengthy article, posted online, that advocated strongly social democracy. Unfortunately the original link has broken but the text below quotes the article in its entirety, interjected by responses.

“Democracy is a form of government in which all citizens take part. It is government of the people, by the people, and for the people. Socialism is where we all put our resources together and work for the common good of us all and not just for our own benefit. In this sense, we are sharing the wealth within society.”

Socialism is the abolition of private property in the means of production, i.e. no individual owns the physical entity of or is entitled to the capital value of any capital or producer good. Once this has been accomplished there remains the problem of how to direct these resources to the most highly valued ends. Contrary to the tacit assumption of many socialist thinkers there is no separate, conscious entity who feels and knows what the “common good” is; there are only individual humans who each value different ends independently; they may agree, in some cases, on what are valuable ends but they still hold these values as individuals and they are liable to change. Further, there will be disagreement on how these ends are to be achieved and precisely which of the scarce means are to be allocated to them. So how is a) the most valuable ends and b) the most suitable means for those ends to be determined under Socialism? How is disagreement on these matters to be reconciled?

All valuable ends are confronted by the same problem – scarcity of the means of production. Hence the economic problem is how to direct scarce means to the most highly valued ends. You can advocate that this can be done either through socialised property or private property but you cannot argue in favour of both together – they are entirely different solutions to the same problem. If you start from the premise that “certain industries” may be socialised you are already advocating that at least some of the factors of production should be allocated to these industries, but this can only be arbitrary. How do you know? And if you know how do you know which factors should be allocated and in which proportion? How do you compare one set of allocations with another set?

A system of private property in the means of production answers this through pricing, profit and loss. For private property gives way to exchange which creates supply and demand which produces prices which produces profit and loss. Hence costs and revenue can be reduced to a single common denominator, the unit of exchange (money), that allows resource allocation to be compared across the entire economy.

In the absence of private property, however, there can be no exchange. There are therefore no prices in the factor of production and no profit and loss. How are the factors of production to be compared? How is the electorate or its democratically elected caretakers of the means of production to compare the cost of 5 tonnes of steel, 3 tonnes of wood, 40 labour hours, 500 sheets of paper, 6 billboards of advertising, 30 hours of telephone calls if it cannot reduce these inputs to a common denominator?

“Of course when people hear that term, “Share the wealth” they start screaming, “OMG you want to rob from the rich and give it all to the poor!”  But that is NOT what Democratic Socialism means. To a Democratic Socialist, sharing the wealth means pooling tax money together to design social programs that benefit ALL citizens of that country, city, state, etc.”

If a person is wealthy in a pure private property society (where trade is entirely voluntary) it is because he has produced a comparatively high quantity of goods that other individuals are willing to purchase. A poorer person has produced comparatively less. The wealth of the rich can only grow if they abstain from consumption of their income and invest it in order to increase the number of goods they can produce. Most of the wealth of the rich consists of, or is derived from, real valuable assets – factories, commodities, plant, shops and inventories. They continue to be rich because these assets are productive – other people are willing to exchange them for another valued good, i.e. money. If they cease to be productive their capital value will decline and so will the wealth of the owner.

If the amount of pooled wealth available for government programs is to increase these real resources have to be liquidated from their current uses and the workers have to be laid off and transferred to Government employment. For every resource that is consumed in a government program that is one resource less that can be used for something else. By which method do you calculate whether the resources are being put to their most valuable ends in the hands of private entrepreneurs or in government programs?

“The fire and police departments are both excellent examples of Democratic Socialism in America.  Rather than leaving each individual responsible for protecting their own home from fire, everyone pools their money together, through taxes, to maintain a fire and police department. It’s operated under a non-profit status, and yes, your tax dollars pay for putting out other people’s fires. It would almost seem absurd to think of some corporation profiting from putting out fires. But it’s more efficient and far less expensive to have government run fire departments funded by tax dollars.”

This is no different from insurance. Individuals pool their premiums together with a private provider in order to provide the resources for extinguishing fires in an emergency and/or compensating the unfortunate victims of fire damage. The only difference is that each individual can choose whether to pool his premiums with one particular provider or not (or at all). The insurer therefore has to act in a way that will retain its customer base, one of which is to keep premiums lower than those of its competitors. The primary method of accomplishing this is to minimise the amount that has to be paid out in compensation and the only way to do this is to prevent and control fires as much as possible. The insurer may, therefore, specify that your home be fitted with some basic fire-fighting equipment such as fire extinguishers or fire blankets and that all of your equipment is electrically tested, for example. If the cost of this is less than the saving you make on a lower premium then you are likely to do this. They may charge higher premiums in cases where flammable substances are stored on a property, or refuse to insure you altogether because the risk would be too great, thus discouraging the accumulation of dangerous materials. The result of this is that each person pays according to the amount of risk he is willing to bear and everyone, consumer and insurer, is equally interested in taking steps to minimise the number of fires as much as possible.

If a fire does start, however, the longer they burn the more the insurer has to pay in compensation to a covered individual. They are therefore likely to respond with the utmost urgency with their own, privately owned, fire fighting equipment or privately contracted fire fighting supplier in order to minimise the amount of damage.

All of these incentives are lost when fire-fighting is managed by the Government. The Government does not need to be concerned about losing your premium to a competitor – you have to pay it in taxes or it will incarcerate you regardless. Hence it is less bothered about minimising the amount of damage. Fewer homes will therefore be installed with preventive equipment and less electrical testing will take place. There will therefore be more fires. Further the tax paid towards fire-fighting services is not adjusted to your individual level of risk; rather it is determined by your income. There is therefore less incentive to avoid the accumulation of risks that contribute towards fire. Every preventative measure you take is an extra cost but there is now no added benefit – you still have to pay the tax and you are still entitled to the same service as everyone else. The result will be less prevention and more fires, more destruction of property and consequently less overall societal wealth.

And finally, once a fire starts, the Government is not going to lose any money if your house burns. Even if it has to pay you compensation the Government will not go out of business if it has to pay too much, unlike a private firm. The Government-employed fire-fighters know that, regardless of what happens to your house, they will, in principle, still be employed and paid tomorrow regardless of the cost to the Government of compensating you for your house. This is not to suggest that Government fire-fighting will always be slow, shoddy and negligent. But given these facts what is the likelihood that a Government fire service will respond more efficiently to a case of fire than a private fire service?

This is a typical case of Government having carried out a particular function for so long that everyone forgets what it looks like when it is carried out privately. Yet the above should demonstrate how it would most likely be done and to a higher degree of efficiency than by the Government.

“Similarly, public education is another social program in the USA. It benefits all of us to have a taxpayer supported, publicly run education system. Unfortunately, in America, the public education system ends with high school.  Most of Europe now provides low cost or free college education for their citizens. This is because their citizens understand that an educated society is a safer, more productive and more prosperous society. Living in such a society, everyone benefits from public education.”

No one denies that education is a beneficial and indeed a good and beautiful thing. But for every resource spent on education there is one less resource to be spent on something else. How do you know that education is the most productive use for these resources?

We could devote the entire productivity of the world to a huge and glorious education system where everyone pops out as smart as Einstein. But there would be no cars, no shops, no food, no computers, no houses, no offices, no factories etc. because all resources are devoted to the education system.

The problem faced by an economic system is not to determine what is valuable in the abstract – it is how to direct the scarce means to their most highly valued ends before all others.

“When an American graduates from college, they usually hold burdensome debt in the form of student loans that may take 10 to even 30 years to pay off. Instead of being able to start a business or invest in their career, the college graduate has to send off monthly payments for years on end. On the other hand, a new college graduate from a European country begins without the burdensome debt that an American is forced to take on. The young man or woman is freer to start up businesses, take an economic risk on a new venture, or invest more money in the economy, instead of spending their money paying off student loans to for-profit financial institutions.  Of course this does not benefit wealthy corporations, but it does greatly benefit everyone in that society.”

But the cost has to be paid by someone. If the graduate has to pay for his own education then yes he has less money to “start up businesses, take an economic risk on a new venture, or invest more money in the economy”. But if everyone else has to pay for his education through taxes then everyone else has that little bit less to do all of those wonderful things. The graduate has only gained what everyone else has lost.

“EXAMPLE  American style capitalistic program for college: If you pay (average) $20,000 annually for four years of college, that will total $80,000 + interest for student loans. The interest you would owe could easily total or exceed the $80,000 you originally borrowed, which means your degree could cost in excess of $100,000.”

If the cost of $80 000 tuition is paid back by the graduate without the interest of, say, $20 000 then that is $20 000 less that can be loaned to another student. There will therefore be fewer funds available to loan to more students for their education. Fewer students will therefore be educated. That is presumably not the intended outcome of this author. Governments, of course, could simply raise taxes to make up the shortfall. But again, all this will mean is that what the graduate has gained the taxpayer has lost.

“EXAMPLE  European style social program for college: Your college classes are paid for through government taxes.  When you graduate from that college and begin your career, you also start paying an extra tax for fellow citizens to attend college. Question – You might be thinking how is that fair? If you’re no longer attending college, why would you want to help everyone else pay for their college degree? Answer – Every working citizen pays a tax that is equivalent to say, $20 monthly.  If you work for 40 years and then retire, you will have paid $9,600 into the Social college program.  So you could say that your degree ends up costing only $9,600. When everyone pools their money together and the program is non-profit, the price goes down tremendously. This allows you to keep more of your hard earned cash!”

The cost of $20 monthly is arbitrary and no proof of this being the real cost under such a system is offered. The conclusion that “the price goes down tremendously” is, therefore, a non-sequitur. If anything, the cost of education is likely to go up as relieving every individual of the cost of his tuition will cause an increase in demand which causes prices to rise.

This is the reason, in the UK, for the recent “outrages” over higher education tuition fees. Government sanctioned loans systems artificially stimulate demand while the Government also caps the number of students, hence leading to a reduction in supply. Increasing demand and suppressed supply equals spiralling costs.

It is therefore Government interference with the higher education system and not private finance that makes bearing the costs of higher education so intolerable to graduates.

“Health care is another example: If your employer does not provide health insurance, you must purchase a policy independently.  The cost will be thousands of dollars annually, in addition to deductible and co-pays. In Holland, an individual will pay around $35 monthly, period.  Everyone pays into the system and this helps reduce the price for everyone, so they get to keep more of their hard earned cash.”

Healthcare premiums are so expensive in the US precisely because of Government interference in the insurance industry (and the only reason that insurance is the preferred method of funding healthcare is an anomaly that originates in The Great Depression). If Governments legislate so as to compel a provider to insure risks which are perceived by the latter as higher and more costly then the latter is forced to take on the burden of paying more than it would like when these risky events transpire (an almost guaranteed certainty if the insured event is something over which the policyholder has control. This is simply compensating individuals for their deliberate actions). Costs, therefore, rise.

Socialised healthcare under Medicare and Medicaid under which the healthcare consumption of an individual is divorced from its cost to the individual, the ease of malpractice suits, and lengthy and bureaucratic drug approval processes mandated by the FDA all contribute to the rise in healthcare costs in the US. None of these are phenomena of the free market.

Holland also operates on an insurance-led basis. One should investigate whether the lower cost allegedly associated with this is because of less and not more Government involvement.

“In the United States we are told and frequently reminded that anything run by the government is bad and that everything should be operated by for-profit companies.”

This is a list of Federal Government departments and agencies. Just a brief glance will reveal Government involvement in commerce, transport, housing, education, broadcasting, agriculture, labour, security, energy, healthcare, environment and engineering. Even if America is “frequently reminded” by somebody “that anything run by the Government is bad” no person can look sensibly at this list and conclude that Government does not already control or regulate vast areas of the US economy.

“Of course, with for-profit entities the cost to the consumer is much higher because they have corporate executives who expect compensation packages of tens of millions of dollars and shareholders who expect to be paid dividends, and so on.”

Executive compensation cannot determine market prices of consumer goods. Every good purchased by you is evaluated on its merits alone, not on the costs that went into producing it. If you deem the merchant’s asking price to be less valuable to you than the utility you will gain from the good then you will make the purchase. Otherwise, you will not make the purchase. It is therefore because an entity’s goods are so highly valued and consequently sell so well that companies are willing to pay more to hire the best employees. Not so if their sales are less successful.

Profit (and loss) is revenue minus costs. In order to make a profit you must increase your revenue as much as possible but what is forgotten is that you must reduce your costs also. Employee compensation is a cost and the higher it is in relation to revenue the lower the profit of the entity will be; the lower the profit, the less it will be able to invest in growth and the sooner it is more likely to stumble in meeting the needs of consumers which is the first step to insolvency.

In 2011, total executive compensation at Tesco plc was £21.7m against a turnover £60.9bn, approximately 0.0356%. Even if executive compensation did drive up consumer prices one has to wonder how such a small percentage could make much of a difference.

Finally, regarding very large corporations one might wish to investigate the effects of monopoly and regulatory privilege granted by Government and the effects of Government–granted limited liability in generating a preference for the large, publically-traded entity before implying that these beasts are creations of the pure pricing, profit and loss system.

“This (and more) pushes up the price of everything, with much more money going to the already rich and powerful, which in turn, leaves the middle class with less spending money and creates greater class separation. This economic framework makes it much more difficult for average Joes to ‘lift themselves up by their bootstraps’ and raise themselves to a higher economic standing.”

You cannot leave the general population with less spending money and push up the price of everything simultaneously. If the population was left with less money then it would have less with which to bid for goods and services. The latter would therefore remain unsold until prices were dropped. If prices were dropped, profits for vendors would drop. If profits drop then costs have to be cut. One of those costs is executive compensation.

If a firm, however, is able to continue to raise its prices without affecting sales and this increases profit margins beyond that experienced in other industries, resources are diverted away from the less profitable industries and into the profitable both by the existing entity and by new competition. Supply is therefore increased and prices consequently decrease.

It is therefore very difficult for an entity to raise its prices to increase profits without a) choking off sales or b) attracting competing investment.

The most effective way for the latter to be avoided is for the entity to induce the Government to regulate the industry. Compulsory licensing, planning permission, Government imposed trading standards, health and safety standards, employment regulation, etc. all serve to deter competition. For every extra regulation that must be complied with is an extra cost that a new competitor must meet and, by virtue of its status as a start-up, must consist of a larger portion of its costs that those of an incumbent provider. There is therefore a tendency for larger firms to become entrenched and for the “Average Joes” to be unable to “lift themselves by their bootstraps” – all because of Government intervention.

“So next time you hear the word “socialism” and “spreading the wealth” in the same breath, understand that this is a serious misconception.”

That is precisely what the effect of socialism is. In a capitalist society wealth accumulates to each person according to his productivity. If another system is adopted then the wealth must be distributed in a different way with a different result; otherwise implementing socialism would be pointless. Hence socialist writers devoted part of their theory to the problem of distribution of goods in a socialist society, i.e. to “spreading the wealth”.

“Social programs require tax money and your taxes may be higher.”

Correct.

“But as you can see everyone benefits because other costs go down and, in the long run, you get to keep more of your hard earned cash!”

What has been demonstrated, in fact, is that costs rise under socialism. If an individual does not have to pay for his consumption, all else being equal he consumes more. Hence demand rises and so do costs.

“Democratic Socialism does NOT mean taking from the rich and giving to the poor.”

It means taking from the productive to fund the unproductive. This can be the only logical outcome of a system other than private property, where the fruit of production accrues to the producer.

“It works to benefit everyone so the rich can no longer take advantage of the poor and middle class.”

It benefits the unproductive ahead of the productive. The unproductive are able to take advantage of the productive. Productivity therefore becomes less valuable and decreases whereas un-productivity becomes more attractive. Societal wealth therefore declines.

POSTSCRIPT: The main error of the author of the original article (apart from providing blatant examples of Bastiat’s famous “broken window” fallacy) is the belief that a market economy provides benefits only for some whereas “democratic socialism” provides benefits for all. Precisely the opposite is true. Under the free market all exchanges are voluntary. If A exchanges a good with B then it must be because they each value what they receive more highly than what they give up. Both therefore benefit from the transaction and we can say that social utility is increased. A system of “democratic socialism” however would necessarily involve violently enforced transactions (taxes). If an individual has to be coerced into a transaction then it necessarily means that he values abstaining from the transaction more than entering it (otherwise he would have entered it voluntarily). The recipients of Government spending may gain (as does the Government itself) but here, in contrast to a market economy, some have gained at the expense of others. As we cannot make interpersonal utility comparisons (i.e. we cannot “measure” utility) it is impossible to say that the gain to one is greater than the loss to another. But even if this wasn’t true the fact remains that the coerced individuals would have gained greater utility from not being taxed and to them the transaction is very much a loss; hence a system of “democratic socialism” does not provide “benefits for all”.

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