Prof E's Blog

~600 words, ~3 min reading time

Okay, so I’ve been looking at the Mercatus numbers.

First, Think Progress IS wrong in their representation. (Think Progress makes the very simple error of acting like an ADDITION to cost is the WHOLE cost.)

HOWEVER,  my initial impression was also wrong. My error was a bit more complicated – I assumed constancy in some things that weren’t constant in the Mercatus estimates, and ended up misrepresenting the results, TOO.

So, let’s try to get it right, and we’ll just focus on one year.

Before we hop in, we need to figure out what we’re talking about. We’re going to look at National Health Expenditures (page 5 is my reference here). What this is: Personal Health Care Expenses + Government Administrative Cost + Net Cost of Insurance (Basically, private administrative costs, I would guess) + Government Public Health Activities

Mercatus starts by looking at personal health care expenses in 2022. They suggest these are projected, under our current system, as being $3.859 trillion. (Note: this includes both public and private systems.) With Medicare 4 All, there would be a big jump in healthcare utilization – amounting to $435 billion. This comes from the currently uninsured being covered and from Medicare covering things that some private insurance doesn’t, and from people using more medical care because they are no longer responsible for copays or coinsurance (so, on the margin, they go to the doctor more often – though I suspect this effect is small). BUT, providers would receive less because of M4A’s pay structure. That would cut $384 billion from provider payments, and $61 billion from prescription drug costs. Net effect: personal health care spending FALLS by $10 billion in 2021.

The other change is that total administrative cost is expected to fall by about $83 billion. Basically, we’re eliminating private health insurance costs,  but Medicare’s administration would have to eat that up – but with some economies of scale, there would be a net savings on the administrative side.

So, total effect: $93 billion in National Health Expenditure savings. The other years in the estimate project savings of up to $300 billion in NHE by 2031.

Now, Mercatus’s point is that, EVEN WITH this savings, the government would be spending an additional $2.535 trillion that year – since it is absorbing the private insurance industry’s costs. They want to know where the money is coming from, since doubling income taxes on both individuals and corporations wouldn’t be enough to bring in that money.

On the one hand, progressives can reasonably point out that we’re already spending this money, it’s just a matter of redirecting it. And there’s a point in that. This $2.535 trillion is not new to the ECONOMY, it’s just new to the GOVERNMENT BUDGET. Okay.

But, would progressives then suggest that we should just have the government absorb the health insurance premiums currently paid by employees, employers, and individuals? I suspect not. That would mean that each person’s premium would vary not based on income, but on their current employer. This would be an administrative nightmare, I suspect. So, while the money is there, there is still the practical question of how best to collect it in a way that isn’t politically disastrous.

Another big point: Blahous is very clear that he’s being generous in his estimates of savings because he wants to estimate the MINIMUM amount of additional tax revenue that would be required.

~300 words, ~2 min reading time

Summary of the full article. Article available from the Mises Institute.

In modern economic theory “competition” is used to describe a state of affairs that is probably best thought of as being the CONCLUSION of a competitive process adjusting to fixed underlying conditions. Something as simple as charging the same price is unlikely outside of the most organized markets. Yet, this is a key feature of the perfect competition model.

The common speech sense of competition understands competition to be a dynamic process – one that is typified by people finding and exploiting differences between themselves and their competitors. This is directly opposed to the perfect competition model which assumes a similarity between firms (and certainly between products!).

Making a fetish of the perfect competition model can lead to odd results – in particular, the suppression of an actual competitive process by the use of regulation to impose standardization.

A more productive path than comparing the real world to a hypothetical world of perfect competition is to compare the real world with competition as commonly understood with the real world with competition (as a process) suppressed by legislation. If we allow the competitive process to occur, entrepreneurs will continually adjust their products and processes to try to produce goods that best serve consumers at the best possible prices. Failure to serve consumers’ demands for quality and price will result in losing business to competitors. On the other hand, suppressing competition – perhaps by using price regulation to enforce a common price – will tend to suppress the desire to serve consumers well and efficiently.

~300 words, ~2 min reading time

This summarizes a section of Ludwig von Mises’s Socialism titled “Economic Calculation”, available from the Mises Institute and Amazon.

Value is fundamentally subjective. For a single consumer, comparing the values of different consumer goods is fairly straightforward. Similarly, comparing the values of factors of production in fairly simple production processes is also fairly straightforward, as the connection between the factors of production and the resulting consumer goods are clear. However, once the production processes achieve any significant degree of complexity, a direct value comparison becomes impossible – especially since there are typically a multitude of possible methods of producing any particular good. In order to deal with this situation, we need economic calculation – the calculation of profits, losses, and equity.

Economic calculation requires two conditions: first, there must be exchange of the factors of production. (This is why socialism – which Mises uses in the strict sense of government control of the means of production – can’t calculate. With government controlling all the means of production, there can be no exchange of them.) Second, it must be a monetary economy. With these two conditions, factors will have money prices, which can be used to calculate costs, profit, and equity.

Economic calculation is not perfect. It cannot account for certain “non-economic” considerations. (Mises cites the example of a productive process that destroys the beauty of the natural landscape.) However, without economic calculation, there is no clear guide for how to produce what we would like to produce.

Socialism can stumble along for a bit, if it holds to the old pattern of production. Since preferences and resources usually don’t change very quickly, the old pattern of production won’t be far from the right one at first. However, in the real world, change happens – which means that holding to the old production patterns would cease to be rational as time passes.

~700 words, ~4 min reading time

Chapter 8 in the Rothbard Reader, available from the Mises Institute or Amazon.

One of the primary contributions of the Austrian school was moving from thinking of goods and people in terms of “classes” to think of them in individual units and as individual people. This emphasis on the individual provided three main insights.

(1) The Law of Diminishing Marginal Utility – while classical economics was stuck on the paradox of value (best seen in the diamond-water paradox, which points out that water is essential for life but cheap while diamonds are mere decoration but are expensive) and had to propose that there was a disconnect between use value and exchange value, Carl Menger pointed out that this paradox is resolved if we think about the usefulness of an additional (that is to say, marginal) unit of the good. While water, as a class, may be very important, the reality is that we have so much of it available in most places that humans live that ADDITIONAL water isn’t really very useful. As a result, water is cheap – we’re not willing to pay much to get more than we already have. Diamonds, however, are very rare. So, we are willing to pay a lot to get an additional one. By thinking in terms of exchanging individual units of the good, Austrians could discover this law of diminishing marginal utility – which connects exchange value with (marginal) use value.

(2) Time Preference – where does interest come from? With their faulty value theory, classical economists were stuck going one of two directions. One group – which led to the Marxian view – suggested that interest was a kind of “surplus value”. The labor embodied in the good was what gave it value, so if the exchange value was greater than that intrinsic value, then the difference was a “surplus” of value. Another group suggested that capital is productive. So, the reason that capitalists earn interest or profit is because they own productive resources. However, both of these views are incorrect. Austrian economist Eugen von Bohm-Bawerk builds on Menger’s individualist view of value to show that what distinguishes capital is not its exploitative nature (which competition between employers would diminish) nor its productivity (which should be fully embodied in the price of the capital good when it is purchased). Rather, it is time. When an individual acts, they demonstrate a preference for sooner want-fulfillment to later want-fulfillment. What a capitalist does, then, is pay for the production of a good up front – knowing that they won’t get the revenue until later. They would only do this if they expect the revenue to be enough greater than the cost that it is worthwhile to delay gratification. That is: if they receive interest. Meanwhile, workers are willing to work at a “discount” below the value of the product precisely because they do not have to wait for the final product to be sold before they receive their pay. They are willing to sacrifice some money in order to get their pay sooner rather than later.

(3) The law of diminishing marginal productivity – finally, thinking in terms of individual units allows for the Austrians to explain, for example, wages (and other factor prices). Factors are paid according to their marginal productivity – that is what an additional unit of the factor would add to production. We can’t arbitrarily divide production of goods from distribution of income. Rather the two are intimately connected. Distribution of income is not arbitrary – rather it comes about as a result of marginal productivity. This thinking also changes the question of class dynamics. Laborers and capitalists should not fight over how to distribute goods between them – the two are partners, as labor and capital are typically complements. (That is, most of the time, having more capital makes labor more productive – raising wages, while having more laborers makes capital more productive as well!) Rather, the conflict should be between members of the SAME class. Rothbard’s example: a new discovery of copper doesn’t hurt workers (who will now have additional jobs available) or consumers (who will find that copper goods are cheaper). It hurts those who ALREADY PRODUCE copper, as they see the price of their product decline. So, then, the Marxian approach suggesting there is some fundamental conflict between labor and capital is incorrect. Rather, conflict exists WITHIN each of these classes – labor v labor and capital v capital.

~ 400 words, ~2 min reading time

Available from the Mises Institute or Amazon.

Planning for Freedom – interventionists claim that their version of economic planning is radically different from the socialists’ as well as the capitalists’. They claim to be able to achieve a best of both worlds. However, interventionism tends to create results that are counter to the stated intent. For example, minimum wage, rather than lifting all workers (and especially the least fortunate) tend to lift some workers’ wages while disemploying others entirely. Similarly, high union wages tend to end up suppressing nonunion wages. If we want to help everyone, we should allow for a maximum of freedom, which will encourage entrepreneurs to produce what consumers want and to do so as productively as possible (raising wages).

Middle of the Road Policy Leads to Socialism – Following from the previous chapter, the middle of the road policy tends to be a road to socialism (that is, full government control of the economy). Consider a price control on milk – which is intended to make milk more affordable and available to the lower classes. However, the price ceiling will lead some farmers to produce less milk – instead they’ll produce things like butter or cheese which are not price controlled. So, milk may be cheaper, but it is less available than before. To offset this, the government would have to place price controls on the inputs (and perhaps the other goods that milk producers would be tempted to switch to), so that it is profitable to produce milk even at the lower price. This would simply lead to fewer of those inputs being made available – leading to yet more price controls being needed. In the end, the government would have to take over control of all production in order to meet its goal of providing more, affordable milk – just as in full socialism. This path is not mere conjecture – it was largely along this path that the British economy became socialist through World War 2, and that the German economy became socialist (of the Nazi variety) in the lead up to World War 2. The march toward socialism is, however, reversible, if the people adopt an ideology that is not simply anti-communist and anti-socialist, but is a positive endorsement of the market system that has led to the prosperity we have.

~200 words, ~1 min reading time

The full text is available from the Mises Institute or from Amazon.

Introduction – What distinguishes the Austrian school: (1) devotion to a deductive method aimed at conceptual understanding, (2) methodological individualism – seeing economic phenomena as the result of individual actions.

The Subjective Theory of Value – Value is fundamentally subjective. Even prices are the result of subjective valuations of amounts of money (and their expected eventual use) and the goods that are being traded for that money. Producing for exchange means that we need to consider not only our own preferences, but also the preferences of our buyers. The fact of subjective preference suggests that there is no “economic man” who is bound purely by monetary calculations. Rather, monetary concerns are balanced against other concerns as well. For example, anticipating modern behavioral economics and the idea of “bounded rationality”, Bohm-Bawerk points out that the process of economic calculation is, in itself, costly in terms of time and effort. So, for trivial matters, it is probably best to follow general heuristics, saving the effort of monetary calculation for larger matters where precision is more important.

~200 words, ~1 min reading time

Full text available from the Mises Institute or Amazon.

The Individual in Society – This chapter is about the meaning of “freedom”. Mises suggests that there is no such thing as “freedom” from nature. All people are bound by scientific laws. To be meaningful, “freedom” then is freedom from the arbitrarily imposed will of others. At the same time, complete freedom from the influence of others would come at the price of abandoning all social relations. A market economy based on private property allows for interactions that enhance our productivity, while still allowing people to be free from compulsion and coercion. Historically, those who want to subvert freedom have tended to shift the definitions of terms – suggesting that employees are “wage slaves” rather than being really free, for example.

The Elite Under Capitalism – People are born unequal in certain respects – leading to “superior” and “inferior” people. In precapitalist societies, the superior used violence to take advantage of the inferior. In the market economy, the superior can only benefit by serving the inferior – producing products that the inferior are willing to pay enough for. So, in a market economy, the consumers – most of whom belong to the “inferior” group – end up “ruling” the superior – in that it is the masses of consumers that determine how profitable a business will be.