Central Planning and Prices

I continue to read the New York Times to explore the thoughts of the seriously misguided. Yet again, no disappointment there. THIS EDITORIAL falls squarely in the misguided column.

What’s amazing to me, is that the Editors are SO close to the truth here, but they just can’t seem to understand the fundamental problem. They suggest, correctly, that through government subsidization for health care insurance to an increasing number of citizens that total system costs will inevitably go up. Oh, so true. And that concept encompasses so much within it. And shockingly, the Editors get it. But, yet again they disappoint. They once again fall back to the virtues of central planning and central management as the solution.

Medicare ought to be empowered, for example, to reduce its payment rates to the highest-cost hospitals and most inefficient doctors. That is probably the best way to get them to stop providing needless tests and treatments that don’t improve the health of the patient.

Medicare should also be allowed to use the results of comparative effectiveness research to set reimbursement policies favoring the best treatments. Unfortunately, as currently written, the House bill calls for that research but prohibits Medicare from using it to set rates. All of these ideas seem well worth trying.

The long-run solution is to move away from Medicare’s fee-for-service system that rewards doctors and hospitals for each additional service they provide and move into a new system where doctors and hospitals are organized and rewarded in ways that encourage both low-cost and high-quality care. The problem is that nobody is sure of the best way to do that. The House bill is right to set up pilot programs to test some approaches. But more ideas should be developed and tested.

These people can’t understand that we’ll see the same results from this central planning as we have from all attempts at it in human history: failure. You can see it on display in the current Medicare and Medicaid systems and anywhere else in history– see ALL of the Soviet system for examples.

One should really ponder the most basic question: why do all efforts at central planning fail? The answer is a simple concept, but complex in explanation.

The failure of all central planning lies in the inability to do basic economic calculations of price. Setting proper prices affects all subsequent economic calculation, especially the concept of the most efficient and proper allocation of resources in an economy. Without the iterations of the free market setting prices, then the central planners have no basis to go on to know how to set a proper price, and this spans the spectrum from suppliers of raw materials to labor to consumers.

This was best explored and answered by the great Austrian Economist Ludwig von Mises in his essay “Economic Calculation in the Socialist Commonwealth” available HERE.

In a summary HERE:

Mises identifies THE critical problem in socialist economics- the lack of a means for allocating capital goods. Once the state owns the means of production markets for capital goods disappear. Market prices for capital goods emerge through competitive biding as entrepreneurs estimate the values of different capital goods. If we abandon markets, central planners must still choose between alternative capital goods, but they will not have market prices to guide them. Since all value is in use and is subjective, central planners face an impossible task when they try to ascertain relative values for capital goods. Mises proves that in a dynamic, changing world of subjective value and complex productive processes, markets are an indispensable means of organizing production.

Without the collective wisdom of many, many players in a free market, each one estimating value and price, each one at personal risk for error, and each one self-interested, there is simply no way to know about proper prices. Without the collective wisdom of the market setting prices, then errors occur in further economic calculation, which then inevitably leads to fundamental errors in allocation of resources. Improper allocation of resources leads to both excesses in some parts of the economy and shortages in others.

Medicare is an current example of this failure. Medicare sets prices for everything it covers; no market exists, just a few “committees of experts.” As a result we have massive and unarguable inequities in the marketplace:  general undersupply of doctors, massive undersupply of primary care doctors, massive undersupply of rural doctors, massive undersupply of rural health care access in general, massive oversupply of aggregate demand (read total system costs). The list could go on.

The reality, and I agree it is a stark reality, is that central planning fails…always…no matter how smart the planners, no matter how well-meaning the planners, no matter how important, central planning always fails.