Lucas Explains Whole Life Insurance

~ 2300 words, ~ 12 min reading time

About 15 years ago, I was introduced to the Infinite Banking Concept when I met Nelson Nash and his wife at the Mises Institute. He was giving out free copies of his book Becoming Your Own Banker. When I read it, I decided (1) it sounded very interesting and (2) I didn’t understand the thing at all, because I was unfamiliar with whole life insurance. So, all the examples just felt totally made up. And that was where I was for a long time. Then, just recently, I ran across this article by Robert P Murphy. He provided a key insight that let me understand how whole life insurance works. Here, I will share that with you in my own way – though reading Murphy’s article is also certainly worthwhile.

The Infinite Banking Concept

The basic idea behind infinite banking is that you can use whole life insurance as a saving instrument from which you can make withdrawals and take loans. Nash’s book shows that this is typically superior to simply saving using Certificates of Deposit (and certainly beats borrowing from a bank!) or something like that as long as you’re dealing in a reasonably long time frame.

Unlike term life insurance, whole life insurance builds up a “cash value”, which you’re allowed to access – in part or in whole – permanently or temporarily – before you die. And that’s really the key to the whole thing.

Nash’s book includes lots of tables showing the amount of cash value that builds up over time in different types of policies, and shows how you could access that cash to do things like give yourself a car loan, pay for retirement, pay for your kids’ college, etc. (Note: a lot of Infinite Banking is about carefully designing a whole life policy so that it builds cash value quickly while keeping the tax benefits that life insurance provides.)

The natural question I had: how does this cash value thing really work? I’m familiar with term life insurance – where you pay a (at my age, small) premium and if you happen to die in the agreed upon term, the life insurance company will give your beneficiaries a bunch of money. To understand whole life, then, it seemed I really just needed to get my mind around the “cash value”.

Cash Value Explained Badly

The typical explanation for cash value goes something like this… “Each year, we put part of your premium into accumulating cash value while the rest pays for the death benefit.” (from insurance companies) Or “Whole life insurance is a combination of an expensive insurance policy with a mediocre savings plan.” (from critics like Dave Ramsey)

This leads to a natural question: HOW MUCH of my premium is going into cash value each year? If you look for this answer, you can’t really find it. But, hey, I have Excel. I can make some assumptions and figure it out, right?

Wrong. All my attempts to do this ended up making no sense. Cash value doesn’t accumulate the way that you’d expect, say, money in a savings account to. It grows – but the rate of increase in the growth isn’t consistent. True, that’s probably because the % of your premium that goes into the cash value changes over time.

So, I recently used information I got from (which is the ONE insurer I could find that would give me a detailed statement of cash value over time without me having to give them my contact information – I am very averse to receiving sales calls…) to try to tease things out. With the premiums and cash value structure I got from State Farm, I could assume a rate of return on cash value, and then find out what the implied death benefit premiums were. Unsurprisingly, I found that the death benefit premium went up over time. This is what I’d expect. Since you get the death benefit when you die, you’re going to pay more for it if you’re closer to death. But, there were a couple surprising things: (1) The premium for the first couple years was ENORMOUS. Is it really that common for people to take out life insurance policies just before they commit suicide, so that your odds of death in year 1 are so big that a basic whole life policy should accumulate $0 of cash value for a couple years? (2) the premium rose at an increasing rate (not surprising) until you hit age 85, at which point the premium rises at a DECREASING rate. Okay, so I’m a LOT more likely to die at 85 than at 84 (I’ll grant that), but only a LITTLE more likely to die at 95 than 94? That feels a bit… wrong. But, I suppose I’ve not seen the mortality tables…

Another problem with this explanation: it opens whole life insurance up to the worst criticism against it. If you die, your estate does NOT get BOTH the cash value AND the death benefit. It just gets the death benefit. Now, defenders of Whole Life will say things like “if you sell your house, do you expect to get BOTH the equity you built up AND the whole sale price?” (from The Bank on Yourself Revolution by Pamela Yellen) But, this analogy is a bit goofy if we accept the “part goes to death benefit, part goes to cash value” explanation of whole life. When I use a mortgage to buy a house, the part of the home payment that doesn’t go to escrow is ENTIRELY used to pay down the home loan and its interest. I build up equity not because the bank is investing part of the money that I pay them into the house, but because the loan is getting smaller. So, are you saying that when I take out a whole life policy that the insurance company LENT me the policy, and I’m paying it off, so that I build up “equity”? If that’s the case, then why do I get the whole death benefit if I die early?

The better analogy based on the “part death benefit, part cash value” explanation is “buy term and invest the difference”. If I buy a term life insurance policy and also invest in something – stock, bonds, llama farms, whatever. When I die, my heirs get BOTH the life insurance death benefit AND my investments. So, using the “divided premium” explanation DOES make it look like whole life insurance is a big old scam to seize people’s investments when they die.

Good news! As Murphy explains: this explanation is just wrong.

Cash Value Explained Reasonably

Let’s take another stab at explaining cash value.

We’ve already mentioned one key difference between term and whole – the accumulation of cash value. But, there’s another, and it’s absolutely essential in understanding why cash value exists. If you pay your premiums on a term p0licy, you very well may still walk away with exactly $0. How? You don’t die during the agreed term. That is, in fact, what the life insurance company is hoping for.

If you pay your premiums on a whole life policy, you WILL walk away with the death benefit. Guaranteed. Either you’ll get it because you die (and since there is no expiration, you’re pretty well guaranteed to do that at some point), OR you’ll get it because the policy matures (which typically happens when you turn 121, now a days).

What that means, then, is that, from the life insurance company’s perspective, when you buy that $100,000 policy, they are going to be paying you $100,000 unless they can convince you to cancel it. The cash value, then, is really a BUYOUT. It’s an offer from the life insurance company to try to convince you to cancel the policy early so they DON’T have to pay the entire $100,000.

So, why does cash value grow over time? Two reasons: (1) early in the policy, you are least likely to die. Later you’re more likely. This increasing odds of a payout soon makes the life insurance more eager to get you to cancel. (2) early in the policy, you have lots of premiums to pay throughout the remainder of the policy. Later, you don’t. So, early on, if you cancel the policy, the insurance company loses decades of premiums they would receive. They don’t want to do that. But, later, when you’re closer to “death or 121”, you have fewer payments left to make. So, it doesn’t cost them much to have you cancel.

It’s the combination of (1) and (2) that lead the insurance company to want to make you a buyout offer that increases over time.

This ALSO explains why different variations with the same annual premium can provide very different cash values. Consider just 3 options: standard whole life, 10 pay, and paid-up. With the standard policy you pay the premium forever. With 10 pay, you pay premiums for just the first 10 years. with paid-up insurance, you just pay once. Naturally, for a given death benefit, you’ll pay MORE each year if you use 10 pay than a standard policy, and you’ll pay even more for the paid-up policy than you would for a single year’s premium on a 10 pay policy. In effect you’re “paying in advance” for these two structures. It turns out that if you shorten the pay period, you get cash value faster. Why? Because you’ve accelerated reason #2. With a standard policy, I would have possibly 80 years of additional payments coming – this dampens the insurance company’s enthusiasm when it offers me a buyout. But, with a 10 pay policy, I only have 9 additional payments after the first. They’re not losing much if they make a reasonable buyout – and are possibly saving themselves a big death benefit expense. With a paid-up policy, they ALREADY HAVE all the money they’re going to get – so there is no “expected future premiums” to offset their desire to make a buyout offer.

When you die, why don’t you get the cash value AND the death benefit? Because the cash value was a buyout offer to convince you to give up the death benefit. You didn’t take the buyout offer and got the death benefit instead.

So, why can you access this cash value through loans? The reason is fairly simple: the cash value is an asset with a guaranteed value. If I have an asset with a fairly clear value, I can take out a loan using that asset as collateral. Most obviously the case with mortgages and home equity loans, but, with pawn shops, you can do this with literally anything that has a reasonably clear resale value. In this case, it’s the insurance company which provides the asset (the buyout offer), so they’re certainly willing to lend you the money now – and don’t particularly care when you pay it back. At worst, they cancel your policy if the interest on the loan accumulates to more than the cash value is worth. So, no credit check is needed.

What about withdrawals? That’s easy to explain, too. What you’re doing with a withdrawal is taking a PARTIAL buyout. So, you can, for example, sacrifice half the death benefit by taking out half the cash value.

Explaining Dividends

Okay, the last odd thing about whole life insurance (which, weirdly, I never found particularly confusing) is the payment of dividends. When you sign up for a dividend-paying whole life policy, you’ll have the policy itself which offers you a guaranteed cash value over its life. In effect: things are predictable enough on average that the insurance company knows the buyout offers it is willing to make over time. But, you’ll also have claim to dividends which ARE NOT guaranteed. Where do these come from?

Here, we need to get into the old-timey structure of mutual life insurance companies. The basic idea: a bunch of people get together and pay premiums. This money is then invested fairly conservatively so that it can pay any expected expenses (people dying, agents’ commissions, etc.), and probably earns a bit more than that. So, what to do with the “bit more”? As with any business, it should go to the owners. So, who owns the insurance company? In a mutual insurance company, the policyholders do. So, the dividend goes, as it always does, to the owner.

Now, one option that you have is that you can use this dividend to buy more insurance in a paid-up fashion. Since paid up insurance provides a large % of cash value immediately, this is often a reasonable option, and is generally advocated by Infinite Banking/Bank On Yourself.

So, How About Infinite Banking/Bank On Yourself?

I’m going to save my analysis for the next post, but I do want to mention some important points about Infinite Banking/Bank on Yourself.

(1) Infinite Banking and Bank on Yourself advocates typically do not advocate buying just a basic whole life policy. The cash value builds up too slowly to be used for banking purposes. At the same time, they don’t advocate a plain-vanilla paid up insurance policy EITHER. They end up somewhere between using a couple of “riders”. The purposes: build up cash value as fast as possible WITHOUT triggering negative tax consequences.

(2) Nothing in this should be read as me advocating for Infinite Banking or Bank on Yourself. I am not a financial planner or financial advisor. I don’t even have a whole life insurance policy myself, and I’m still not decided whether it makes sense for me to do it. More to come on that. Each of us must make up our own mind. My goal in this post was just to explain some of how cash value actually works. This does, somewhat accidentally, answer one of the big criticisms of whole life insurance (not getting the cash value when you die).

I hope this helped!

Garrison’s The Austrian Theory of the Trade Cycle and other Essays (Selections)

~400 words, ~ 2 min reading time

These are the Mises U selections from Garrison’s collection The Austrian Theory of the Trade Cycle and other Essays. The book is available from both the Mises Institute and Amazon.

Garrison – The Austrian Theory in Perspective – the Austrian business cycle theory (ABCT) incorporates capital structure in a way that Keynesian and Monetarist theories don’t. While ABCT doesn’t explain everything, it does provide the core theory for why business cycles happen. Details, however, are dependent on history and institutions. Thus, expositions of the theory will vary over time – and should! – as each exposition should reflect the concerns and institutions of the time.

Rothbard “Economic Depressions: Their Cause and Cure” – Any cycle theory should explain (1) the recurrence of business cycles, (2) the cluster of errors that gets revealed in the crisis, (3) the relatively large impacts on capital goods industries. ABCT does this by combining Humean arguments to explain recurrence, Mises’s argument about the information content of interest rates sending a false signal to entrepreneurs, and the relatively larger impact of interest rates on capital goods industries predicted by Austrian capital theory. To cure depressions, the government should refrain from credit expansion (which causes the problem in the first place, and can only prolong the malinvestments by covering up the errors as they grow) and cut back spending (freeing up resources for the private sector). This theory was on the edge of widespread acceptance until Keynes presented his theory – which did not refute Mises’s theory, but simply led many to forget about it.

Hayek’s “Can We Still Avoid Inflation?” – The answer: obviously yes, from a technical standpoint. However, politically, it’s not clear that it is possible, because, in industrialized countries, we have a combination of strong labor unions who will fight any drop in money wages – so that any change in relative wages requires that nearly all wages rise – and a central bank holding to a full employment policy – so they will increase the money supply in response to any increase in unemployment that the unions’ demand for higher wages brings about. [Lucas’s Note: Hayek’s essay is a bit dated. At least in the US, labor unions have seen a significant decline in recent years, and the Fed has developed a more balanced approach to employment and price inflation, and acknowledge that they have more impact on prices than employment in the medium to long run.]

Rothbard’s What Has Government Done to Our Money? – Parts 1-3

~1250 words, ~6 min reading time

[Since this series is focused on the Mises U readings, I focused only on the sections that are required for that. Full book available from the Institute or Amazon.]

I – Introduction – Discussions of money are confused, largely because of a desire to be “realistic” – to consider only minor deviations from the current system. This constraint on thinking prevents us from thinking about what a free market in money would really look like, since government has interfered in the monetary system for such a long time.

II – Money in a Free Society

1 – The Value of Exchange – because of the variety of locations of natural resources and the variety of people’s wants and abilities, exchange is a useful way to get what you want from those who are most able to provide it.

2 – Barter – barter runs into issues of the “double coincidence of wants” (that is, I have to have what you want and you have to have what I want) and indivisibility of many goods. So, barter’s ability to be the primary means of exchange is limited.

3 – Indirect Exchange – It may be beneficial to receive something that I don’t directly want if it is widely marketable. So, I will exchange what I have for something I don’t want, but can easily get rid of for what I DO want.

4 – Benefits of Money – Money allows for more specialization – and the resulting productivity boost. Money prices also allow for economic calculation, which opens the way to complicated production processes.

5 – The Monetary Unit – in a free market, money is a commodity like any other, and so will be denominated in the natural unit of physical goods: by weight.

6 – The Shape of Money – the entirety of the stock of the monetary commodity counts as the money supply – coins, bars, dust, etc. – as it is the commodity rather than the form that makes it money.

7 – Private Coinage – in a free market for money, private companies would mint the monetary commodity into easily recognizable coins. They would determine size, shape, etc. based on consumer demand, and consumer demand combined with reputation would ensure quality – just as happens with other goods.

8 – The “Proper” Supply of Money – like with any other good, the proper supply is the supply entrepreneurs provide. The purchasing power of money can adjust to accommodate any money supply. At the same time, production of the monetary commodity is not inherently unproductive because the commodity has nonmonetary uses.

9 – The Problem of “Hoarding” – all hoarding does is increase money’s purchasing power. And there is no clear distinction between hoarding and simple money holding.

10 – Stabilize the Price Level? – Like all commodities, the value of money would fluctuate based on changes in supply and demand. It’s not clear why this is a bad thing. Some suggest that it changes the relationship between creditors and debtors – yet, these are free to adjust based on a price index if they wish. Yet, we do not see private lenders and borrowers doing this, suggesting the alleged benefit of stabilizing the price level is minimal in the eyes of those who are supposed to be the ones benefiting.

11 – Coexisting Moneys – we can’t rule out that there may be more than one money in a free market for money. (Example: gold and silver) If so, the two would have a floating exchange rate between them.

12 – Money Warehouses – in a free market, banks would be money warehouses. They would simply charge fees to store money – they would not engage in fractional reserve banking. But, even if we adopt free banking, the extent of fractional reserve banking would be quite limited.

13 – Summary – in short, the free market can provide money just like it provides anything else.

III – Government Meddling with Money

1 – The Revenue of Government – Governments often resort to monetary inflation to fund themselves, as the effects are less obvious than the effects of taxation.

2 – The Economic Effects of Inflation – Inflation redistributes wealth from late receivers to early receivers of the newly created money, makes economic calculation more difficult, which leads to economic inefficiency, can destroy the monetary system through hyperinflation if it goes unchecked, and leads to business cycles.

3 – Compulsory Monopoly of the Mint – Government has to take over the monetary system step-by-step. The first step is claiming a monopoly over minting coins, which allows government to charge a monopoly premium for minting.

4 – Debasement – once they have a monopoly over minting, the government can begin decreasing the size or at least the precious metals content of coins. The profits from reminting old coins as new can be used for revenue.

5 – Gresham’s Law and Coinage

a. Bimetallism – in setting a fixed ratio between gold and silver prices, government ended up creating a situation in which one money was used while the other was hoarded – and the two would switch back and forth. This led to an elimination of bimetallism and adopting a gold standard.

b. Legal Tender – legal tender laws require people to accept the standardized money in payment for debts. This gives the legal monetary standard an advantage, which opens the way for government to intervene more in the monetary system.

6 – Summary: Government and Coinage – The final step is making use of all foreign coin illegal. This, in turn, disrupts international trade and therefore the international division of labor. To increase government control beyond this point, the economy must move beyond hard money.

7 – Permitting Banks to Refuse Payment – One privilege that banks have been given is the ability to simply refuse to pay their obligations while staying in business. This allows banks to inflate without having to worry about bank runs as much. However, it does not provide much control over the inflation from the government’s perspective.

8 – Central Banking: Removing the Checks on Inflation – One of the key moments in the government taking over the banking system’s operation is when they monopolize note issue and centralize reserves in the central bank. This removes one of the key limits on banks’ ability to create money: the extent of their own clientele.

9 – Central Banking: Directing the Inflation – Government effectively controls the money creation process by injecting new reserves into the banking system through open market operations and discount window lending, and by controlling the legal required reserve ratio.

10 – Going Off the Gold Standard – While central banking loosens the restrictions on individual banks in their ability to inflate, the system as a whole faces the problem of gold outflows if they overinflate compared to other countries. This problem leads governments to take their currencies off of the gold standard entirely – leading to currencies that are purely fiat.

11 – Fiat Money and the Gold Problem – By leaving the gold standard, government increases the number of moneys as it is unreasonable to assume that people will just stop using gold as money and instead rely entirely on paper. This leads governments to ban the holding of monetary gold.

12 – Fiat Money and Gresham’s Law – in a world of fiat currencies, any attempt to peg exchange rates will lead Gresham’s Law to kick in – that is, the overvalued currency will fall out of use in international transactions while the undervalued currency (historically the dollar) will find more use. This leads to a shortage of the undervalued currency. The end result of this intervention seems to be a single, world fiat currency.

13 – Government and Money – In the end we have seen that the government got into money to acquire an easy source of revenue, and that to take full advantage of this required a series of increasing interventions – but each of these created a series of problems leading to more intervention. The world of national paper moneys creates barriers to the international division of labor – lowering our productivity.

Leonard Read’s “I, Pencil”

~100 words, ~1 min reading time

This is a short essay that I will attempt to make shorter…

No one knows the full process of how to make even a simple pencil. Rather, it is accomplished by each person using their limited know-how to accomplish tiny steps in the process, with the steps being coordinated by mutually beneficial exchange.

Because simple things are so complicated, it is important to allow people maximum freedom to create and improve processes, and to engage in exchange.

Mises’s Profit and Loss

~650 words, ~4 min reading time

Full text here.

The Economic Nature of Profit and Loss

The Emergence of Profit and Loss – Profit and loss emerge as entrepreneurs purchase factors of production in anticipation of future prices of consumer goods. If the future were perfectly predictable, profit and loss would not exist. They only exist because change is constant.

The Distinction Between Profits and Other Proceeds – Entrepreneurial profit is not interest. It is not wages for the labor of entrepreneurs. It is not monopoly gains. Entrepreneurial profit or loss is what is earned because of the quality of decision making. If you want to identify an entrepreneur, identify who would take a loss if things went badly.

Non-Profit Conduct of Affairs – In the absence of profit and loss, bureaucratic rules and regulations are the only viable alternative. This applies to governments as well as other non-profit organizations.

The Ballot of the Market – while entrepreneurs are the decision makers in the market, consumers have the final say, as they vote with their dollars for what they want.

The Social Functions of Profit and Loss – Profit and loss are the return on good (or bad…) entrepreneurial decision making – that is redirecting resources to their highest valued ends, in the minds of the consumers.

Profit and Loss in the Progressive and the Retrogressing Economy – in a progressing economy, profits are greater than losses, allowing for an accumulation of capital, which allows increased production. This requires real saving. An economy that is consuming capital will have greater losses than profits, and will retrogress.

The Computation of Profit and Loss – profit and loss are naturally psychological. However, in a monetary economy we can calculate them.

The Condemnation of Profit

Economics and the Abolition of Profit – Some, inspired by Marxism, have declared that profit should be abolished. If this is a purely moral claim, then economics has little to say about it. However, if the claim is that this would benefit workers and consumers, then economics can analyze whether this is true.

The Consequences of the Abolition of Profit – profit is what makes entrepreneurs accountable to the consumer. Abolition of profit would then turn entrepreneurs into unaccountable managers, resulting in chaos.

The Antiprofit Arguments – All the arguments against profit are

Selgin’s Praxeology and Understanding

~550 words. ~3 min reading time.

Full text here.

Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics – Austrian economics faces the challenge of skepticism. GLS Shackle has suggested that economic laws aren’t really useful because the economy is typified by patternless “kaleidic” change. Some Austrians have adopted this view as well on some level.

Praxeology: The Method of Economic Theory – Economic laws come from logically deducing from the action axiom, which is undeniable.

Ideal Types and “Exact Laws” – Praxeological laws are true regardless the specific content of people’s preferences or the specific circumstances in which they find themselves. The question is simply whether they apply in a specific case or not. This means that praxeological laws cannot be “exact” (in the sense of being numerically precise). We may use ideal types to fill in some “common sense” preferences and so on when doing historical work. However, Mises draws a sharp distinction between history and theory. Theory is purely the logic of choice. History allows for (and requires) consideration of specific preferences and interpretations of situations.

From Mises to Lachmann: Austrian Revisionism – Three thinkers led some Austrians to question the value of praxeological reasoning. (1) Hayek suggested that praxeology by itself provides very little real-world insight, and suggested supplementing it with “common sense” assumptions about the content of preferences. (2) Shackle focused on the importance of uncertainty – but in a radical form. In the strong form, Shackle’s view is that economics cannot deal with the “kaleidic” nature of the future. In this, Shackle confuses determinism in concrete application with determinism in logical patterns. (3) Lachmann emphasizes the need to deal with “divergent expectations”. Profit and loss provide good feedback for past expectations – but provide little guidance for future expectations.

Equilibration and Coordination – the praxeological understanding of equilibration is really just about the removal of a felt uneasiness. So, while we may never reach “equilibrium” (a state where there is no felt uneasiness), action is equilibrating in as far as it is successful. But, to be successful requires foresight. If the future is “kaleidic” (that is, basically unpredictable), then there is no reason to expect that action will generally be successful. The claim from Shackle and Lachmann is that human action is radically unpredictable. So, in as far as my action being successful requires the action of others, there is no reason to expect that it will be successful.

Implications of the Kaleidic Society – In short: praxeology can’t really “prove” that society isn’t kaleidic. Rather, what it can prove is that a kaleidic society is one where action doesn’t really happen in any meaningful sense. If the future is kaleidic, then one can’t really undertake purposeful behavior – that is, action – in any meaningful sense. Since there is no clear connection between our behavior and the effects of our behavior, we will never be able to remove any specific felt uneasiness except by pure chance. In addition, the advocates of the kaleidic view have failed to explain their own bothering to engage in economic theorizing. If the future is kaleidic, then engaging in economic research can’t be expected to serve any particular purpose. So, why do it? Rather, their own behavior suggests that those that claim to believe in a kaleidic future don’t actually believe in it in any practical sense.

Gordon’s The Philosophical Origins of Austrian Economics

Full text here.

My brief summary:

Austrian economists Menger, Bohm-Bawerk, and Mises all had various philosophical influences.

Aristotle – influenced Menger through Bentrano. Against the German Historical School, which emphasized the interconnectedness of everything and denied the existence of any kind of universal economic laws that would apply across different societies, Bentrano emphasized the ability to separate pieces of reality in our analysis. Specifically, Bentrano separated the acts of the mind from the objects of those acts. In Menger, this showed up as people making judgments of value. So, value is not intrinsic to the good – or even to the mind. Rather, it is a matter of a judgment that the mind makes about the good. Aristotle also emphasized that true science is deductive – treating empirical science as a stand-in for true science until our understanding of the deductive structure develops sufficiently.

Occam – had a big influence on Bohm-Bawerk – especially in the need to trace all concepts back to their origin in perception. This led Bohm-Bawerk to reject mystical sorts of notions in social science and to be very concerned with clarity and thoroughness in the analysis. This is especially obvious in his criticism of Marx. Rather than settling at criticizing the labor theory of value (which would have been sufficient), Bohm-Bawerk criticized Marx more or less line-by-line.

Kant – Not as big an influence as you’d expect. He provided some of the Misesian language, but Mises doesn’t rely on Kant’s philosophical system.

The Logical Positivists – probably the biggest influence on Mises, but in the negative direction. Much of Mises’s more philosophical work was defending a deductive method against the logical positivists, who favored empirical methods as being the only real way to do “science”.

Rothbard’s Anatomy of the State

~200 words, ~1 min reading time

Confession: Despite having been on the faculty for Mises University for a few years now, I haven’t actually done all the readings. Now, don’t get me wrong, I read the readings for when I was a student back in 2003 and 2004. But, things have changed a bit. So, I’ve decided to try to read through some of the Mises U readings this year – anything I’ve not read, or have too vague a memory of. Then, I’ll offer a (very!) brief synopsis here. So, here’s the first – which I had never previously read!

Anatomy of the StateMurray Rothbard

What the State isn’t – us.

What the State is – a regional monopoly on the use of force.

How the State preserves itself – creating vested economic interests, but ideology that supports the State as good or at least inevitable even moreso.

How the State transcends its limits – by controling the power of interpretation of its limits.

What the State fears – losing its power through conquest or revolution.

How States relate to one another – mostly through war. Though we used to recognize that war was between States rather than between peoples.

History as a race between social power and State power – sometimes the creative forces run ahead of the State – leading to an increase in freedom. Other times, the State catches up. We have yet to find a good method of limiting State power.

A Fundamental Problem with Socialized Medicine – One Lesson Alfie Teaches Us

~750 words, ~4 min read time

I’m a bit of a weirdo when it comes to medicine. I will happily agree with basically anyone who says that the American medical system is messed up. The system is designed so that no one ends up actually comparing costs and benefits. Patients and doctors generally are trying to maximize benefits while insurance companies are trying to minimize costs, with no one really comparing the two against each other. The result is a system that gives mediocre performance on the whole, and does so very expensively.

I’m even willing to acknowledge that a reasonably designed socialized system might even perform better. Along that measure, the UK’s NHS is quite good. They evaluate cost per quality-adjusted life year (QALY). So, expensive routines that aren’t likely to extend or improve life aren’t likely to be approved. On the face of it, this seems like a reasonable system. Compare the cost of a treatment to the benefit. Obviously a good idea.

But, there’s a reason that I don’t advocate for socialized medicine. Preferences are subjective. How much is another year of life worth to you? I suspect everyone who reads that question will give a different answer. And there’s nothing special about years in your life. We each have different values we attach to everything. Some people believe that black licorice is very valuable. So valuable they’d even be willing to pay for the ability to eat it. Then there’s me. The subjectivity and diversity of preference is part of fundamental economic reality. What the market system allows us to do, rather brilliantly, is convert a vast array of subjective preferences into an objective number – price – that reflects the value of increasing the production of a good by an additional unit. This price can then be compared with the cost of increasing production by that unit, so that profit-seeking entrepreneurs produce just the right amount of the goods that are produced by the market.

Socialized systems cannot do this. They lack the necessary mechanism for reacting to individual preference. So, even if we assume perfect information about cost per QALY, the fact that we don’t have perfect information about each patient’s VALUE per QALY suggests that some patients will be over-served (if they place a low value on extending their life) and others will be under-served (if they place a high value on it).

To me, this is one of the lessons that Baby Alfie can teach us. The NHS simply could not account for the preferences of the people involved (the parents in this case). What they knew: treatment was expensive and unlikely to add QALY. So, it should stop.

I know it is uncomfortable – and to many feels borderline sociopathic – but when it comes to decisions about life and death, we have to consider both benefit and cost. For most of human history the reality was that death was not a financial choice. Staying alive was either cheap (buying basic food and shelter) or impossible (because we couldn’t effectively offset the effects of most diseases, old age, war, accidents, etc.). So, there was never really a point where a person would have to make a financial decision about life and death.

Today, though, things have changed. We have the technological ability to keep our bodies going for long periods of time. We can treat most diseases on some level. But, it’s often expensive. And worse, it’s expensive in monetary terms. So, someone has to decide: is it worth $3,000 per day to keep someone alive on life support?

It’s a difficult decision, no doubt. But, it must be made. The question is by whom? On the one hand, doctors are in a good position to estimate the odds of recovery. Naturally, if keeping someone on life support for a week is likely to lead to a full recovery so that the person will go on to live for another 30 years the calculation is a bit different than if the odds of ever recovering is basically zero.

However, doctors are not in a position to place a value on the person’s life – where the person’s family is in a much better position both to represent the person’s own decision, if they were in a position to make it themselves, and also to account for the impact of the person’s life on those around them. Easy? No. Heart-wrenching? Absolutely. But, is it better to ignore the subjectivity involved and impose a one-size-fits-all policy instead? I suspect not.