Of Coase Things Won't Change Much

 

“The NHS will be safe again in Labour’s hands” they tell us. “With Labour in charge, the NHS will now get proper funding”, they declare. But that’s not the right way to look at things. The NHS is not in so much trouble because of which party is in government – mark my words, when Labour has finished however long they are in office, the NHS is unlikely to be in a better state than it is now, and that’s because politicians are not allowed to be honest about the problems, and about how ill-equipped they are to deal with them. Don’t get me wrong, I really value the ‘free at the point of use’ element, and my experiences of NHS workers show that they do a fantastic job under extremely challenging conditions. But, alas, for several decades now, the NHS situation has been that politicians pretend that only their party has the solutions to make it better, and members of the public pretend to believe whichever party they happen to favour. If politicians brushed up on their economies, and were voluntarily injected with truth serum, what I’m now going to say is roughly what they’d concede is the truth.

For many complex reasons that are too broad for a short blog post, institutions like the NHS, the Civil Service, Central Government, the EU, etc have become so bloated that they fall victim to diseconomies of scale, where it’s prohibitively difficult to manage the system efficiently through the command economy model. The economist Ronald Coase explored the optimal size of institutions in his “The Nature of the Firm", although he wasn’t talking about institutions like the above. For Coase, a firm is a collection of individuals coordinated by a management structure to achieve specific economic goals – largely, organisations that engage in economic activities to produce goods or services with the goal of minimising transaction costs.

But such firms do simulate the above institutions in that they involve a hierarchical structure, where decisions are made to coordinate the allocation of resources. Looking at the trade-offs between market exchange mechanisms and top down central planning, the latter is frequently devoid of the important information signals that markets provide, and the former is sometimes devoid of the centralised initiatives that maintain a perspective on the bigger picture.

In The Nature of the Firm, Coase determined that a firm optimally undertakes transactions by having an efficient internal hierarchy, where firms expand their activities internally up to the point where the costs of internal hierarchy and command are balanced against the costs of conducting those transactions in the market (such as outsourcing to external suppliers). That’s why an efficient firm (and, by extension, institution) will attain the right internal mechanisms alongside the efficiencies of economies of scale when outsourcing production activities when it’s more efficient to do so.

Under the Coasian theory, this is what determines the equilibrium size of firms, and goes a long way to explaining why the organisations suffering from diseconomies of scale are so consistently underperforming. When the internal structure becomes too complex or burdensome, with excessive bureaucracy, rigid hierarchies and inadequate upward/downward/sideward communication structures, inefficiencies will arise, leading to increased costs and reduced effectiveness in service delivery. And politicians mired in structures that are constructed and sustained with exactly the same inefficiencies are unlikely to be sufficiently equipped or competent enough to significantly improve something like the NHS.

The Good Cop, Bad Cop Post-Covid Analysis

 

In 1963, a psychologist called Bob Rosenthal conducted an experiment in which his assistants placed rats in mazes, and then timed how long it takes the rats to find the exit. They were housed in two pens: one for the smartest rats and one for the ordinary rats - and when released, the assistants thought that the smartest rats found the exit more quickly than the ordinary rats. In reality, there was no difference between the two groups of rats – it was the assistants’ expectations that tricked them into believing smart rats solve mazes more quickly.

This plays out in many walks of life – we are surrounded by self-fulfilling prophecies in the making. A teacher who treats his pupils as though they are smarter than they are probably will observe them doing better than expected. A teacher who treats his pupils as though they are hopeless will likely see the opposite effect. If you treat your husband or wife as though they are the most valuable person in your life, you will see more of the value in them than if you treat them as though they are not your priority.

This is known in psychology as The Pygmalion Effect, after Ovid’s Greek myth, where a sculptor called Pygmalion regards his own statue as beautiful, falls in love with it, and it comes alive. When we have high standards and high expectations of others, we get better results; when we have low standards and low expectations, we get poorer results. People are inspired or uninspired by how we value them.

Similarly, placebos (positive) and nocebos (negative) become self-fulfilling prophecies too. If you believe you’ve taken a pill that has a positive effect on your well-being, you might act as though it has. If you believe a pill has negative side effects, you may feel those side effects based more on your belief than on any real side effects. If you believe your bank is going to collapse, you might bring about a bank run, which then causes the bank to collapse. If the Prime Minister forewarns a recession, he might engender a recession, as people could become nervous about spending money, and be reluctant to invest in others.

Applying all that to Covid - over the past 4 years, just about everyone has wondered whether the government's policies to tackle Covid have been worth the cost. Those who say that Covid hasn’t been that serious for most people so we didn’t need all those government restrictions may be missing the point that it might be because of government restrictions that Covid hasn’t been that serious for most people. It could be fallacious to use the successes of the restrictions as an argument against the restrictions, just as it might be foolish to argue that the lack of nuclear warfare in the past 50 years is a good argument as to why we don’t need nuclear weapons (it may be that it’s because of nuclear weapons, and the deterrent effect, that there hasn’t been nuclear warfare in the past 50 years). 

But that said, there has been a book recently published by the Institute of Economic Affairs, containing research by Johns Hopkins and Lund University that casts quite a few aspersions on the efficacy of the lockdowns during Covid. The lockdowns appear to have reduced Covid deaths by a lot less than one might have hoped, given their astronomical costs.

Now, I’m not going to state the obvious cases for and against the government’s Covid policies. Anyone can work these out for themselves, and decide how they feel about the decisions based on their own personal preferences. But many people rightly insist that individuals are better equipped than the government to know their own individual risk calculi, and how much they value things like going to work, seeing family, socialising with friends, going to school, attending weddings and funerals, etc. For this reason, they argue that the government had no business making such life-changing decisions on the nation’s behalf. Many others seem quite glad that the government took control and made such bold decisions, and feel that things could have been a lot worse without the strict policies imposed on us. The best argument for the government’s decision seems to be that the NHS couldn’t have coped if everyone had remained free to undertake their own risk calculi.

On that basis, an argument that could be made in favour of that proposition is that we could be living an even more dismal reality had we not have lived through this strict regime. An argument against the proposition is that the reason we aren’t living an even more dismal reality is because we adjusted our behaviour accordingly to compensate for the increased risks, and could have done so without the government’s decision to impose such a massive financial and social cost to the nation. There’s no question that, for Britain, the NHS factor makes the matter much harder to resolve.

Aside from the stability of the NHS argument (which isn’t trivial), I really can’t think of a good argument that trumps the argument for the liberty of individual choices on how they behave during a pandemic. One counterpoint is that we didn’t know just how bad the virus was and how great the risks, so we needed the government to make that decision for us. But it’s not a very convincing argument. If your car has a squeaking sound on the morning you are about to drive across the country to see your family, you don’t know for sure whether you should risk the trip, stay at home, or pay extra and go on the train. It might not be an easy decision, but it certainly won’t be the case that outsourcing the problem to the government will make them better equipped to decide for you. No politician knows enough of the factors to act on your behalf on this matter.

This logic also applies in response to the other common objection - that without the government to impose restrictions, then by socialising you may well infect people who didn't want to be infected. But in the vast majority of cases, that argument doesn't hold. It's true that if I went to church, or to Frank's 60th birthday party, or to the snooker club, I might have infected others. But the people at those events also knew the risks of attending, but did so anyway, presumably because they took the benefit of attendance as being worth the risk in terms of their own personal utility. Besides, if your argument is that socialising during the pandemic is reckless because those who socialise do not bear all the costs of their decisions to socialise, then it may have slipped your notice that the politicians imposing all the restrictions on us, and decimating the UK economy in the process, bear virtually zero costs for their actions. When those politicians were caught breaking the rules they imposed on the rest of us, their actions suggested that they weren't especially bothered about the risks of catching Covid, and that they had little respect for the efficacy of the laws they imposed on everyone else.

Healthonomics:

This is a frequent phenomenon called Gammon's Law (after Max Gammon), which follows a predictable pattern whereby increase in expenditure will be matched by fall in production, where the more resources a system swallows up, the less efficient it becomes in terms of production per unit of investment. Pretty much any big centralised institution - health, schools, taxation, the EU, the church - when it gets so big that it passes through the efficiencies of economies of scale and begins to suffer from diseconomies of scale (see also the Dunbar number) will show a pattern whereby increased input produces decrease quality of output. In economics, the Rahn Curve (named after American economist Richard W. Rahn) is a graph that illustrates that there is a level of state spending that helps increase growth rates, but that there is a point over which it reduces growth rates. 

Research from the Cato Institute indicates that when government spending expands beyond about 20% of GDP, economic growth diminishes. This often works alongside Gammon’s law, where increase in expenditure will be matched by fall in production, and where resources get sucked into a black hole of diseconomies of scale and the overall production as a ratio of resources inputted diminishes. At the time of writing, the NHS has 1.6 million employees, and there are 66 million people in the UK. That means there is one NHS worker for every 41 people in the UK. You recall we mentioned Wagner's Law, which observes that with increasing economic growth we generally see a rise in state expenditure. Research by the Adam Smith Institute revealed that the total health budget exceeds £100 billion a year, and that management staff numbers increased by about 12% over the past five years, while the number of frontline staff increased by only 2%. It seems clear that the UK's NHS could be managed better: it appears to be simultaneously falling foul of the dangers of Wagner's law, post the optimum point on the Rahn curve, and exhibiting the kind of inefficiencies that Gammon’s law portends.

But whether it is the right type of system being sub-optimally managed, or the wrong type of system altogether is a complex question - not least because the question of the right size of government is an even more complex question. This is due to the fact that humans are adaptive, goal-oriented beings involved in a complex social nexus with lots of incomplete information. And consequently, the wisdom of central intelligence sometimes serves the system best, and other times it is best left to the price systems in the market. 

The challenge, as ever, is to find a way to incorporate the qualities of a kind of socialist-individualist-libertarian triumvirate at the personal level with the qualities of the free market and its concomitant mechanism for price theory to efficiently balance supply and demand. I am naturally sympathetic to a system that draws from the efficiencies of market prices, but I believe that good health care is essential to individual well-being and society's ability to thrive, and no one should be without it, especially society's poorest and most vulnerable people. I'm friendly towards a system in which taxation is collected to fund health care for anyone who is poor and can't afford it, to fund research, to subsidise low earners, to support vulnerable people, and to provide a safety net for every single person who needs it. A nation that doesn't start with that premise is ignoble. But given this as a sine qua non, there are some more complex elements to health care that need addressing. I'm not sure that any health care system that's ever been created is efficient and comprehensive enough to manage the full gamut of complex human needs without sub-optimality in some of its parts - and therefore, the studies that compare different nations' health care systems and look to highlight the relative strengths and failings are probably of limited scope. I think any analysis of health care is (distally) also a study of human society, and is going to have to include the concession that it impossible be maximally efficient and get everything right.

In my estimation, the most efficient healthcare system would be one that reflects the spirit of community libertarianism: that is, it has all the efficiencies of market-based allocation of resources and competition, but it is provided under a framework that reflects a health service free at the point of delivery for all, so no one, rich or poor, ever has to worry about not getting the range of health care they need. Consequently, I think the market is not fully equipped to tackle the complex problem of health provision. 

A typical libertarian argument is this: Doctors are professionals; they know things about our health that we do not, and they can make us better, which is why they command high salaries. Patients, on the other hand, are professionals too - they are professionals over their own lives. But when it comes to our health and well-being, we should approach this kind of reasoning with caution. There is a lot we don't know about our health, our future needs, how our behaviour affects others down the line, what viruses may be lurking round the corner (Edit to add: think of Covid-19 as a prime example), and how much health care we are going to need throughout our life (especially in old age). Even if it an imperfect model, there may be some mileage in preferring a centralised health system, as long as implicit in that framework would be a scenario for individuals where their preferences and their expenditure are more closely aligned. 

The main reason that the healthcare considerations are too intractable for purely bottom-up local market management is that health is a far too complex lottery to reflect the same incentives and value created by the market. Through no fault of their own, some people will have the genes or misfortune or accidents that mean they cost the health service tens of thousands of pounds, whereas others will go through life costing virtually nothing. A civilised society should be one that cares for all its citizens equally, giving everyone the security of healthcare that's free at the point of delivery. A health system that resembles an insurance model with coverage funded by pooled resources is a must in a society that purports to provide a security net for its citizens. The thought of a society that bases health care on what people can afford is one that should be repudiated at every level. When it comes to health, there are some outcomes that some individuals have no chance of managing without the pooled resources of others - and the bottom-up market system doesn't contain all the information needed to factor in the range of complex human health needs.

As an economist, I believe the market solves a lot of the problems a lot of the time, but not all of the problems all of the time. But I think human health (for different reasons to defence and rule of law) is a problem that needs top down centralised information processing, because it doesn't have the foresight required to capture the diverse range of human needs. A society that successfully cares for the complex needs of human health and well-being cannot be at the mercy of market-driven supply and demand computation, which is subject to chaotic instability and power law distributions that would be inimical to comprehensive health provision if left unchecked. It's not often I'll endorse a Marxist principle, but when it comes to healthcare, I think a tolerant and compassionate society should deliver according to the Marxist principle of “From each according to his ability, to each according to his need”. I think the only model that can satisfy this is one in which every worker contributes to a health insurance scheme regulated by the government. Higher earners may if they wish opt for private insurance, and insurance companies can compete for business to provide customers with cover. This would take out the politicisation of the health system.

A system in which most health care insurance was run independently by private operators, where providers would compete with other providers for patients based on price and quality of service, can form part of the national health framework. After all, many private companies successfully provide goods and services for public health institutions. Under a benevolent libertarian system, some providers would be part of big corporations, whereas others would be large cooperatives, and others still smaller businesses specialising in particular practices. There probably would even be many charitable organisations funded by benefactors. This would also open the market for insurance companies to offer incentive based premiums for a diverse range of people with diverse lifestyle choices (and no, I don't mean like the cost inflation-inducing American insurance system). It might be a health system rather like that of a shopping mall, where doctors, dentists, pharmacists and opticians are linked together by a nexus of industry and efficiency, where prices, supply, demand, value and incentives are more coterminous in their relations. 

If that seems like moonshine, remember, someone in the 1950s would be quite astonished to think that you could walk in to a supermarket, scan the goods in your basket and tap a payment card on the sensor to complete the transaction. Imagine in the future when money earned and money spent on health care can be so much more prodigiously efficient thanks to advanced technology. An awful lot of positive developments in society are made possible by life-changing technology. Think of any detective movie in the old film noir era with Humphrey Bogart and Robert Mitchum and imagine how much easier their cases would be to solve with a smart phone. Think of how much easier the protracted scientific revolution would have been if all the exponents had laptops and the Internet. Think of how much quicker the Industrial Revolution would have gathered momentum with more advanced electrical and combustion capabilities.

I said earlier that competition is usually good for efficiency. But with ill health and injuries, this causes me some concern, because when you have small-scale competition for cherry-picked services, firms tend to opt for services that are easy to manage and readily profitable. Not only does this tendering process amount to increased bureaucracy, and excessive use of time and staff resources - it very often is awarded to poor quality low bidders whose profits are made by cheap resources, and under-trained and under-staffed units. This doesn't work so well for patients whose health is at stake, because injuries or illnesses that are complex and risky are in danger of being refused.

In summary
There must be a negative effect on any health service model because of those who use health care too much because of bad decisions (alcoholism, smoking, drug use, binge eating), making supply shorter for the majority who need health care through no fault of their own. The system might be more efficient if people who make these bad decisions pay a higher insurance premium. But I'm not sure there could be an efficient top-down system that could be less costly than the extra costs these people would cost a public health service. Equally, a health care system, like a car insurance system, that said 'yes' to every single claim everyone wanted would be providing too much health care and costing the nation too much money, so there needs to be an optimum amount of health care provide. For example, if everyone visited the doctor every time they had a cold or a blister, the GP surgeries would be inundated beyond the capacity to cope. And I'm very sceptical of large scale operations that try to operate with the dual mandate of serving the public and trying to be financially profitable - you usually get the worst of both worlds, where failure to serve the public well enough is blamed on the financial pressures of solvency, and the failure to remain financially solvent is down to the pressure to serve the public to full capacity.

Given the complex nature of health, human physiology, diseases, infections, health prevention, research and future unknowns, I have a feeling that healthcare is one of those institutions where public service must take precedence over tight financial regulatory, and that we might just have to accept that erring on the side of generous expenditure to cover pubic need is a requirement for the kind of healthcare coverage that provides the safety net that gives everyone free health care at the point of delivery, and the peace of mind too. I'm not denying that every effort should be made to ensure money is spent as prudently as possible. But in terms of outcomes, quality and efficiency, a healthcare insurance system that combines the universal 'free at the point of delivery' safety net of a public service with the consumer sovereignty, competition and the innovative dynamism of a market system looks to be the one that will give citizens the closest approximation to what they need. The free market can do a lot to reduce inefficiency in society, but markets can't do everything - they involve people responding to the incentives that markets and free enterprise provide - but health is likely to remain far more complex than that, and should continue to yield to a model that prioritises a compassionate ethos, peace of mind, and safety net.

 

A Better Way To Tackle The Social Care Crisis

In the past day or two, a few unsettling headlines that show the NHS in a bad light have got everyone arguing again about who in Westminster is going to save the day by giving it the spending it deserves (the reality is far scarier as I blogged about here). This has followed recent political deliberations from politicians and political commentators alike about whether a council tax rise is the answer to our social care funding crisis. It is not; in fact, raising council tax to fund the social care crisis is a bit like trying to get rid of a stray cat from your back door by throwing tuna chucks at it.

One of the big problems in the UK is that the government spending is far too large. Coupled with the fact that the burden of public sector spending (on health, education and pensions, as well as on social services) is rising faster than the tax that can be generated to pay for it, this amounts to a big problem that's only going to get worse.

The main reason this problem has been allowed to get out of hand, not just here, but right throughout Europe, is because there is not enough of an incentive for politicians to curb their spending. And the reason for this is that the tax burden falls disproportionately on a small subsection of the population, whereas the voting habits fall on a much wider proportion of the population. For example, the bottom 50% of earners are only picking up about 5% of the total tax bill, so their motives to desire increased public spending are out of kilter with the viability of that spending.

A good way to lessen this problem would be to introduce a tax reduction program whereby the tax bill is distributed more evenly while at the same time reduced as a whole. So, for example, if there was a cap on how much the highest earners could be taxed measured up against the average tax, the incentives to oppose dodgier costly government spending projects would be heightened, as would government revenue to pay for the increasing social care costs (the costs that aren't picked up by the clients themselves). It would also help if we sorted out this little problem I blogged about a few years ago.

The World's Greatest Healthcare Plan?

In just about every economy I know of, there are numerous state-mandated distortions going on whereby normal market signals are being skewed either by being exaggerated or by being suppressed.

Because of this, people frequently get paid more than the marginal value of their labour, higher prices get passed on as costs to customers, as do lower prices as costs to providers (the medical profession - the topic of this blog - is perhaps the worst case in point), and the whole price system of value being attached to choices becomes distorted.

As well as all the other costs to society in the shape of lost value and forgone opportunity, what also happens is that people are given perverse incentives, which means when they are acted on there are all sorts of sub-optimal outcomes in relation to supply, demand, cost, quality, access and lifestyles.

Now it's fair to say that America's healthcare system has been in a bit of a mess for the past few years, with Obamacare proving to be far from effectual. For those unfamiliar with how it works, I'll try to summarise what I see with an analogy, where the people around the table are American citizens. 

There is a group of 7 friends sitting at a table with a big cake they are about to share. Obama's grand plan was to invite 4 other friends around to share the cake while at the same time promising that the 7 people's share of the cake wouldn't be any smaller. Obama carried on maintaining that the USA is a country of 10 or 11 people eating a cake and only 8 or 9 are paying for it, and thus he wanted the other 2 to chip in.

Both sides of the debate constantly seemed to be lacking two vital things; 1) The solution of making the cake bigger, and how to do it. And 2) The fact that there is more than one type of cake, and by inviting friends over you might have to change from a cake you like to one you don't. Moreover, it would be more fruitful for some of the critics (on both sides) if they learned the difference between health care and health insurance (Those who had a healthcare plan and were on board with Obama's vision probably thought those who were the most recent to sign up would get whichever leftover options were available).

Anyway, Donald Trump, who never seemed that keen on Obamacare has now, after meeting Obama at the White House, decided he might be interested in keeping some of the key provisions of Obamacare.

Given the foregoing, I thought you might be interesting in this proposed legislation for American healthcare, sponsored by a member of the House Republican leadership and a member of the health committee in the Senate - it is modestly titled The World’s Greatest Healthcare Plan. Read the whole thing, please do - but for a bullet-pointed summary, here are the major provisions of the legislation:

• It repeals all the ACA mandates and replaces current tax and spending subsidies with a universal tax credit that varies by age and geography, but is the same regardless of income.
• It ensures that the health care safety net will always be adequately funded, regardless of the number of people with private insurance.
• It allows Medicaid to compete with private insurance, since the size of the tax credit for private insurance is roughly equal to the federal contribution to a well-managed Medicaid plan.
• It allows employers to buy individually-owned insurance for their employees — insurance which they can take with them from job to job.
• It replaces all tax-favored medical accounts with a Roth Health Savings Account.
• It gives employers and employees new tools to control costs, allowing them to convert insurance benefits of marginal value, dollar-for-dollar, into take-home pay.
• It denationalizes and deregulates the exchanges and subjects competing health plans to a type of “free market risk adjustment.”

Here is a summary of the major provisions of the legislation, with links to short white papers explaining each of them. Here are 25 problems in the ACA that the legislation is designed to correct. Whether it would still be beset by many of the political problems that plague domestic healthcare plans is still the big question. But it's an interesting proposal to look over - particularly if you're an American reader.

It's More About 'How' It's Done Than 'Who' Does It

Supermarkets provide a good illustration of why it's not who controls the company that matters it is the company's effectiveness in the free market that matters most. Supermarkets like Sainsbury's, Tesco and Morrisons are public limited companies traded on the stock exchange, whereas with Waitrose the workers have mutual ownership, and the Co Op is a consumer cooperative consisting of more than 8 million members having mutual ownership.

What this shows is that it doesn't much matter who runs supermarkets, what matters is how they are run in terms of creating market value. What's creating market value for shoppers is that all these supermarkets are driven on by competition - which is why we get multi-buy deals on food, shopper saving incentives, and the ability to have our groceries delivered to our door if we wish.

The NHS follows a similar heuristic - as long as it is being run most efficiently, and remains free at the point of delivery, it doesn't matter whether it is public services running it or private services. That's because, like supermarkets, market qualities are about efficiency not ownership. For those who want the NHS to be free from the more efficient private services due to an almost religious attachment to its state-ownership, here is a question they need to answer. If they believe state-ownership is the most efficient way to create value why do they not want food nationalised too so that supermarkets are under public ownership?

They'll usually argue that health is different and that you can't subject something as important as health to the markets. But it shouldn't escape their notice that food is pretty important too. Without it we'll die. Why is public ownership better in the case of health but worse in the case of food? No one seems to be able to say, which is the classic sign of it being merely an emotional bias divorced from evidence and reason.

The arguments against the market are too often short-sighted or illogical. The Pope made a similar mistake in a recent encyclical - arguing that water is such a precious resource that it shouldn't be privatised. His logic is backwards: resources that are scarce, precious and valuable need to be guided by market forces of supply and demand, because it is the free market that most efficiently allocates scarce, precious and valuable resources, not governments or private interest groups. Around the world you'll find water shortages are horribly exacerbated by wealthy interest groups benefiting from water subsidies.

Like water, health is scarce, precious and valuable. It's scarce because there is huge demand and limited supply. It's precious because good health is one of the most vital things about being alive. And it is valuable because our health is what enables us to work, function and progress in society. Like all things scarce, precious and valuable, society doesn't need our health services being misallocated or uncompetitively costed or frivolously managed under the guarantee of taxpayers' money.

The introduction of more private run services isn't going to impinge on the NHS's free at the point of delivery ethos, so there is no reason to bemoan private health services at all. With an aging population there is ever-increasing pressure on the health service to greatly increase its efficiency and reduce public spending - and that's only going to happen with market forces replacing state involvement.

So please don't panic - market forces won't affect our ability to have health care readily available, nor will there be any danger of anyone being turned away due to inability to pay (unlike the USA). But mark my words, if the British public don't begin to dismantle the alter before the golden calf of our NHS religion, we are going to be in serious trouble.

NHS Shocks & Stocks

This week we saw confirmation in the media of something that those of us with market-friendly sexual charisma have been envisioning for ages - that the NHS has been hugely criticised for the bad health of its finances (including, for local readers, our own N + N hospital which has been placed in financial special measures).

By now everyone knows that the future of the NHS is very precarious - thanks to a number of factors (which I blogged about here). But what I didn't know until reading some stats by one of the Adam Smith Institute think tank members is just how much clinical negligence there is, and how shockingly costly it is proving to be. Apparently just in the 2011-2012 financial year alone, the total cost for the NHS in clinical negligence claims exceeded £1 billion, with a further £50+ million in non-medical compensation claims. However much does this add up to if we factored in every year, even for just the past decade? Several billion pounds I'd suggest.

There is clearly a whole scope of work to be done in terms of accountability - whether it is incentivising the public to be in charge of finances that match actions to consequences, or improving the internal spending structure (like the case of Hitchingbrooke hospital where significant savings were made by spending more wisely on things like stationery in a competitive market).

Contracting Birth Rates Mean The Gradual Fading Out Of The State

Numerous people in history have uttered the maxim that the measure of a civilised society is how it treats its weakest and most vulnerable members. The elderly are perhaps the best case in point, because children with all their life ahead of them are seen to have plenty of future value, whereas a society that maltreats elderly people may do so on the basis that they have little perceived societal worth.

We used to treat the elderly in ways that would make your blood boil. When we were in hunter-gatherer groups the elderly soon became a burden on the party, taking up resources, slowing them down, and being unable to contribute much by way of hunting or gathering. Consequently, it wasn't uncommon for older folk in the tribe to be starved to death, killed with a sharp or heavy object, left behind to die, or even eaten by some of the tribes with cannibalistic proclivities.

Nowadays we're doing better - we have a social services system that ensures there is adequate treatment for the elderly, and in places like Spain and Italy you'll often find the elderly living with the rest of the family, being cared for until they die. One day we might even allow people the dignity of assisted suicide - a present solecism for which future generations will surely look upon us with horror.

Yet in spite of best intentions, and all the progress we make ethically, there is still something that will cause us big problems in the future, and is starting to already. The problem in question is a financial discontinuity between the tax that can be gathered and the money needed to be gathered to sustain State-funded institutions like the NHS and pensions. When state pensions were first introduced there was an 8 to 1 worker to pensioner ratio. Currently there is a 3 to 1 ratio, but at some point that will be reduced, perhaps even to the point where there is just 1 worker for every pensioner. For this reason alone the NHS is only going to survive if it is fully privatised, which it pretty much will be in a few decades.

But the problem deepens because most developed countries have systems of welfare that depend on a growing population to sustain their workforce. Apparently, though, we're told that after a steady growth since 2001, the past three years have seen birth rates fall quite sharply (that's not to say this trend will continue). If birth rates continue to fall and life expectation continues to rise (both of which seem quite likely) then there will be relatively fewer workers paying taxes towards the NHS and pensions.

Because of this, taxes have been way too high, which negatively affects total revenue from earnings. Also the tax threshold for low earners is far too low, which means people in the lowest quintile are often not keeping enough of their wages, and some finding it is not worth their while being in work at all. There is no question about it: things cannot go on as they are - the State is going to have gradually unload its most costly institutions - institutions that were once affordable, but due to a very different ratio of workers to pensioners, no longer is.

Think Like A Freak: Two Things Worth Sharing

I've been reading Steven D Levitt and Stephen J Dubner's latest book Think Like A Freak - the third offering in the 'freak' trilogy, after the bestselling Freakonomics and its sequel Superfreakonomics. Unlike the first two books, which contained plenty of interesting conclusions from original and daring research, this third offering isn't up to as much, in my opinion. The indication is that they've taken this thematic about as far as they can, and have instead resorted to derivative material, and propensities for stating the obvious.

They appear to believe they are teaching the reader how to "think outside the box", but in reality I suspect the kind of people who'd be attracted to a book like this would be the kind of people who already know how to think outside the box . That said, there are a couple of interesting sections that I think are worth sharing.

1) Nigerian e-mail scams.

You know those emails that tell you a huge sum of money needs to be transferred out of Nigeria (it's pretty much always Nigeria) and that you will get a few million quid if you hand over your bank details. Virtually nobody falls for this, and the fact that it's always Nigeria should compound the alarm bells even more. Why, then, do scammers carry on using Nigeria, when it is so well known that the word 'Nigeria' in a bank transaction email request signals to almost everyone that it is a con? I had predicted the answer before Levitt and Dubner shared it later in the chapter, but it's a quite interesting example of thinking like an economist.

Here's the rationale. Scammers still insist on specifying Nigeria, because sending out millions of emails is pretty much costless, so having the majority of people ignore them doesn't really matter. What would cost the scammers, though, is spending time and money setting up a phony exchange with people who realise halfway through that they are being conned and pull out.

By choosing Nigeria, the scammers are basically saying this: if you're one of the few gullible people left in the world who hasn't been apprised of the Nigeria scam and are likely to fall for it, you will be of those for whom the uniformity of the 'Nigeria' email won't be alarming and prohibitive. With the simplicity of using Nigeria each time, the scammers save having to waste time with all the false positives, and they will continue to catch in their net the few gullible fish still in the sea.

2) Behind the scenes with David Cameron

In this chapter the authors recount an ill-fated interaction they had with David Cameron shortly before he was elected Prime Minister. They explained to Cameron that when you don’t charge people directly for things like health care, they will consume too much of it, which inevitably skews the incentives of both the providers and the consumers (a point I've made in a previous blog).

Levitt and Dubner conveyed the following illustration to David Cameron to highlight the absurdity of free health care with no disincentives:

"What if every Briton were also entitled to a free, unlimited supply of transportation? That is, what if everyone were allowed to go down to the car dealership whenever they wanted and pick out any new model free of charge, and drive it home?"

At this point, the authors tell us, Cameron, who had been all ears up until then, became less enamoured with them. "The smile did not leave David Cameron's face, but it did leave his eyes.” they tell us. Levitt and Dubner took that as evidence that even intelligent would-be Prime Ministers will ignore evidence or good argument if there is the slightest hint that they’ll be unpopular.

It’s certainly true that this does happen frequently in politics, and perhaps this was one of those times (although bear in mind Cameron wasn’t Prime Minister at the time so wouldn’t have been in a position to do much anyway). But it’s equally likely that Mr Cameron responded incredulously because their illustration was a poor one.

Unlike the food analogy I gave in the 2013 blog post to which I linked above, the ‘buying a car’ analogy doesn’t work at all, because the analogy to over-consumption and bodily neglect isn’t there in car buying. People don’t choose what kind of operation they want in the way that they choose the kind of car they want. Skewing the incentives in the NHS and not making people incentivised is a problem, but the NHS problems are not a comparable analogy to nationalised car purchases.

Whether Cameron changed his tone because the analogy was poor, or whether he changed his tone because he knows he’s as guilty as the rest of politicians when it comes to ignoring evidence or good argument if there is the slightest hint that they’ll be unpopular, only he knows.

Anyway, if you like the sound of the above, you could do worse than giving Levitt and Dubner's latest book a look. Maybe (hopefully) one day they’ll be putting Amazon links to my books on their Blog. I promise to try very hard not to resort to derivative material and propensities for stating the obvious. J

* Photo courtesy of Freakonomics blog

What Made Us Bigger? Maybe You Weren't Expecting This....

After writing about fat tax in my last Blog post, there were a few comments suggesting that we don't have a nation of over-eaters - we, in fact, have a lot of depressed people turning to junk food, and that obesity is a symptom of psychological maladjustments.

I feel satisfied that I argued that that isn't the case by explaining the cost-benefit analysis related to eating bad foods - and, of course, one only need to look at the vastly increasing sales levels of beer, fast food, junk food and ready meals to see that consumption has been volitional. But to take it further I thought I'd consider what has caused this proliferation in appetite and consumption to gradually increase as it has.

When I was a young boy there was only one size of fries in McDonald's, and the same was true of milkshakes. Nowadays you can have 'medium', 'large', 'extra large, 'supersize' and maybe even larger (forgive me, I don't recall all the variations exactly, but you get the point - portions have grown). This leads to the inevitable 'which came first? - what we could call the 'Chicken' Supreme and 'Egg' McMuffin question. Did increased weight and big demand cause increased meal sizes, or did increased meal sizes cause increased weight and big demand? I'm not sure, but the former explanation strikes me as being more likely, as it doesn't seem probable that McDonald's would have just increased their portions on a whim to get us fat - much more likely that they responded to demand (perhaps there was an increase in two portions bought).

That being the case, though, what caused the cause - that is, what caused the increased weight that caused the surge in demand? Here's a plausible answer, which I'm not sure is right, but it might well be, judging by eating habits I've observed and things I've heard people say. My suspicion is that the primary cause of increased obesity is low fat foods. While that sounds counter-intuitive, I think it stands to reason - after all, we know beyond reasonable doubt that increased contraception is a catalyst in increased unwanted pregnancies, and that the introduction of low strength alcoholic drinks is a catalyst in increased binge drinking*, so it stands to reason that the same would apply to junk foods.

What's probably happening is that low fat or low sugar junk foods make it more rational to be overweight than high fat and high sugar foods. Here's why. If you buy a really high-in-fat meal like a lamb moussaka from Tesco's or a doner kebab from your local kebab shop, you've probably added as many grams of fat to your body that several bags of crisps or ready made pizzas would add onto you. Tom might not think it worth putting on those extra grams of fat for the pleasure of just one lamb moussaka or donor kebab, but if for the same amount of weight gain he can eat 3 ready made pizzas and 3 bags of crisps he might well think that those extra grams are worth it for the totality of pleasure that all that junk food brings. Suppose, though, that a lot of people would still rather eat more healthily that follow Tom's thinking - even 3 ready made pizzas and 3 bags of crisps might not tempt them. But then along comes low fat crisps and low fat pizza, along with low-fat desserts, low sugar soft drinks, and so forth. Then things change. Now the deal is; for a few grams of added fat, Tom can have a lot more pleasure, eating loads of low fat crisps, pizzas and desserts - and with this possibility in front of him there would come a point when he thought it worth the weight gain for such a lot of pleasure.

So, although it's rather counter-intuitive, I think, along with rising incomes, less exercise, more leisure time and possibly fewer smokers (these are all lateral factors, I'd say) the most likely explanation for increased obesity might well be an increase in available low-fat and low-sugar foods and drinks - amounting to a tipping point whereby many people have gone on to prefer a sustained weight-inducing indulgence with the pay-off of plenty of eating pleasure, and in the process being prepared to add a bit of weight around the hips, stomach and chin. 

* The reason being: contraception means safer sex, which means more people having sex, which then increases the number of unwanted pregnancies (apply this logic to low strength alcoholic drinks and the same applies)

** Photo courtesy of lifewithgreens.com

Don't Nationalise The Rail Industry!

 

If you're a Brit reading this, it's a pretty safe bet to say you'd hate to see the NHS privatised, wouldn't you? I know what you mean - it's a wonderful thing, isn't it - national insurance contributions making health service free at the point of delivery. Although personally I wouldn't want to see it privatised in one foul swoop just yet, there aren’t many things I want to see remain in the hands of the government.

You see, in net terms even the health service would be more efficient if it were privatised (take Singapore's health service as the nearest case in point) with people able to keep their money instead of paying it in NI contributions. The NHS costs are so high primarily because it is so inefficiently used - and the reason it is so inefficiently used is because it’s free at the point of delivery, so there's no financial incentive to minimise one's health and well-being.

To give you an illustration, imagine the government nationalised all food and asked us all to only eat what we needed - we'd be a nation of severe overeaters (we are already, and that's when we pay for our food). That said, despite the health service ideal, where incentives are locked in place, we just don't have the collective wherewithal to optimise this model, which is why I favour a State-funded NHS.

In just about every other instance in the UK, in just about every decade, privatisation has proved far more efficient for the economy and for the taxpayer than services run by the government, or services too heavily subsidised – and that’s an almost ineluctable law in economics. The reasons are standard textbook stuff.  Privatised companies have a much greater incentive than government-run companies to spend efficiently and reduce profligacy.

Not only are governments wasteful (people generally spend other people's money more carelessly than their own) - they do business in accordance with party politics and political pressures from the electorate, as well as subsiding or bailing out failing industries. Furthermore, investment in the rail industry is more proficient when governments aid private companies rather than running it themselves, as economic management that extends long-term is not always good for point-scoring in general elections.

Shareholders are good agents for profit-inducement, which means you usually get better managers in the private sector. Where there is inefficiency, the best recourse is a takeover or switching to competing forces, not State bailouts which are so often inefficient, party-based and largely ideology-driven.

But most of all, increase in competition is proven to be the greatest catalyst for efficiency and improved services. Competition is hard in the rail industry (even these regional franchises don't entirely guard against monopoly power) - but the government needs to do more to engender competition, not take steps backwards to the old days of nationalisation.

Lastly, profits make for a tiny proportion of the rail industry's investors - for example, staff costs alone are about 25% compared with 3-5% profits. The politicians in favour of nationalisation fail at basic rationality when they allude to a public sector profit in one region as evidence for greater efficiency than the private sector in other regions (that’s as injudicious as saying that all restaurants should be nationalised because city hall’s restaurant makes more profit for local government than privately owned restaurants in the nearby high street).

And they fail at basic arithmetic when they count railway labour costs (always the headline-grabbing ‘jobs’) as part of the benefits rather than part of the costs. Those 25% staff costs are borne by the taxpayer in public sectors and by the company in private sectors - but it doesn’t end there – not only are they costs that are only borne by nationalisation – with government expenditure we have to include pension contributions, sick pay, holiday pay, human resources costs, and so forth that aren't factored into the balance sheet, they are costs that carry on through all employees’ working life and henceforth thereafter – and it is either disingenuous or plain incompetent to omit them from the enquiry.

No, while nationalisation has the occasional success story - this usually occurs when the State has come in to take over from a failing private sector firm (and please note: a bad private firm does not logically necessitate a slightly better public sector agent, it necessitates a much better private firm) – history has continually shown that it is not to be preferred to the much more efficient market of competition, enterprise and diversity.

 

EDIT TO ADD: As is usually the case, the measure of success is in the evidence. Here's evidence that the number of rail passengers has doubled in the times of privatisation, following years of decline under the State: http://en.wikipedia.org/wiki/Rail_transport_in_Great_Britain#mediaviewer/File:GBR_rail_passenegers_by_year.gif

Obamacare - It's A Piece Of Cake

On the recent furore surrounding Obamacare; I'll try to summarise what I see with an analogy, where the people around the table are American citizens.

Obama's opponents see a group of 7 friends sitting at a table with a big cake they are about to share. They accuse Obama of saying that he's going to invite 4 other friends around to share the cake while at the same time promising that the 7 people's share of the cake won't be any smaller. Obama is saying that the USA is a country of 10 or 11 people eating a cake and only 8 or 9 are paying for it, and thus he wants the other 2 to chip in.

Both sides seem to be lacking two vital things; 1) The solution of making the cake bigger, and how to do it. And 2) The fact that there is more than one type of cake, and by inviting friends over you might have to change from a cake you like to one you don't. Moreover, it would be more fruitful for some of the critics (on both sides) if they learned the difference between health care and health insurance*.

One thing's for sure - every time I look at health care systems in America, I think of the National Health Service in the UK and count my blessings.

* Those who had a healthcare plan and voted for Obama again probably thought those who were the most recent to sign up would get whichever leftover options were available.

** Photo courtesy of www.nydailynews.com 

Drug & Alcohol Addiction: Illness Or Life Choice?



Most academic papers I've read on alcoholism and drug addiction favour the view that they are more akin to an illness than a life choice.  The principal reason for this seems to be that such activity alters brain states in ways that are beyond the control of the users. This seems to me to be a flawed argument.  Just because an activity brings about physiological ramifications doesn’t mean that it should be seen as an illness.  Excessive sun-bathing alters the state of my skin beyond my control, and excessive junk food alters the state of my body weight beyond my control - but we'd be on dodgy ground if we tried to claim that sun-bathing and bad eating are illnesses rather than choices we undertake of our own volition.  If we are always cautious in exposing our skin to the sun, and always sensible in our choice of health foods, we can avoid the ill-effects that occur as a result of excessive sun-bathing and junk food.  Similarly, if we always drink sensibly and avoid drug taking we can avoid the ill-effects that occur as a result of indulging in excessive alcohol and drugs.

Given the foregoing, then, my feeling is that alcoholism and drug addiction constitute life choices, not illness or disease.  That said, I'm fully seized of the ways in which alcoholism and drugs upset the natural cognitive protocols, and disturb people's desires and needs. To that end there appears to be some kind of correlation between drug dependence and addiction, which may then be considered in accordance with psychological underpinnings (such as depression, absence of ambition, low self-esteem, myopia, and lack of confidence) of which these addictions are by-products.  I will even concur that addictive behaviour is a lot do to with genetic predisposition - as studies exhibit higher rates of addiction among monozygotic (identical) twins rather than dizygotic (fraternal) twins, which clearly suggests genetic factors. 

But the underlying truth seems to be that there is a lot of dogma circulated around the idea of alcoholism and drugs constituting illness or disease - and I don't think this is helpful because it leads many people astray by having them think that willingness to recover is powerless in the teeth of illness.  Hence, my position is that tough love is a very powerful tool of renewal so long as it is employed with kindness, love and grace. 

Individuals plagued by alcohol and drugs are often able to overcome their plight with sheer determination, persistence, and help and encouragment from others - I've seen it happen.  The key for them was that it was not seen as an illness for which they needed treatment, but as a life situation brought about by the willingness to participate in something physiologically, psychologically and socially destructive, and that the impact of this participation was sufficiently degenerative to elicit in the sufferer a diligent and galvanised approach to recovery.  Not everyone can manage this, but that doesn't mean what they have is an illness - it just means that the power of the will is hard to summon up.  I'm not that surprised; I think there is a lot of tragedy and pathos attached to being human - and we all struggle in so many ways. Drugs and alcohol taken in excess are two ways to anaesthetise people against the thrall of human pressure, hardship and tumult - and one can get so lost in them (as one can in religion or extreme politics or cupidity) as they can provide a numbing effect that partially negates the many psychological and emotional problems we face.  Realising these things amount to life choices helps us see that our destiny lies in our control – and this can only be a good thing in encouraging addicts to set themselves free and make a clean break, and in pre-empting potential addicts from ever going down such a destructive route in the first place. 

* Picture courtesy of care2.com

Rent Prices & Social Care; Too Much Restriction?

On BBC's Question Time last Thursday we had a first time panellist (I think it was her first time) - The New Statesman columnist Laurie Penny - whose contribution in most cases demonstrated a half-witted misunderstanding of the topic under consideration, and whose answer in most cases was just about as wrong as you can be. Laurie Penny seems a good candidate to join the likes of Johann Hari, Owen Jones, Medhi Hasan, Salma Yaqoob, Francis Beckett and Polly Toynbee, as part of a group of continually irrational, misinformed and poorly reasoned social commentators who make me want to throw things at the TV when they're on there pontificating.

Her opening statement - that rent control is the answer to the housing shortage - is the focus of my attention here, as it's close to another issue of mine (social care), as well as being the opposite of the truth. Rent control actually does the reverse of the remedy required; it creates scarcity of supply and it exacerbates housing market shortages.

So, what does that have to do with social care? It's another one of those issues where things are going wrong, thanks to the successive governments' inability to address the situation properly. Suppose someone has a family member who is paying thousands of pounds a month for social care, which is happening throughout the country. For many people this amounts to extortionate rates where the person’s life savings are being swallowed up to go into the hands of private care firms. The right question, then, is; are the profits the care homes are making excessive? The other right question is, if they are excessive to the point that other alternatives are preferable, why are elderly people not freer to employ whom they want to care for them (say, 2 family members or friends that need the work)?

One of the golden rules of economics is that if a company is earning excess profits this should create an opportunity for potential competitors to enter the market and charge less while still making a profit. When this occurs in a free market, competition drives prices down to the level of the costs of the most efficient supplier (where costs include the cost of capital). So if a business can sustain these "excess profits" then something must be preventing other suppliers from competing within the care market.

Just like rent controls, imposing a price control will do no good, because if the government does impose a price cap, the cap will almost certainly be too low (a cap too high would have no effect, because to be too high it must exceed current prices, otherwise no one would notice as current prices would be under the cap). By imposing a price cap that will inevitably be too low, the government will only succeed in reducing supply, and thereby harm consumers of care services.

There is a shortage of cheap housing for the same reason that there is a shortage of cheap social care - government restrictions. In the case of housing, the shortage occurs because the government specifies rigid building standards, restricts the use of land, and subsidises mortgage borrowing (all these policies push up the cost of housing and create a scarcity of suppliers). Some people do argue that these restrictive policies are a good idea, and some (like me) argue that they're too bureaucratic and too much of an infringement on the free market. Opinions vary, and that's fine - but those who adopt the view that these restrictive policies are a good idea should not then complain that there is a shortage of cheap housing and a scarcity of suppliers, because the shortage and the scarcity are consequences of the restrictions.

Clearly as there’s a shortage of cheap care homes it would seem that something is preventing competition, as there appears to be a block in care industry with excessive regulations. This is what the government needs to address in order to allow competition to flow. That said, for a balanced analysis, it's worth pointing out that care home running costs aren't all that cheap for the providers; as well as the standard carer costs covering 24 hours shifts, there'll be costs for management and supervisory staff, staff to administer medicine, laundry and cleaning staff, cooking staff, and building maintenance (to name but a few).

So while I'm sure profits are being made, and government restrictions don't help the social care market - a few thousand pounds per month is deemed by some as a pretty reasonable and necessary price, given that the home needs all those staff and services, and has such expenditure.  But that's to miss the main point; it's fine if you're willing, but if you're not then your alternative options are seemingly being restricted too much by the heavy legislative measures imposed upon the system by the government.

Here's how the free market works ordinarily for consumers of goods and services. If any particular supplier seems too expensive, we look to switch to other suppliers. If all suppliers seem expensive, then either entry into the industry is blocked by regulatory constraints, or if it isn't blocked then the activity probably just has an expense to justify such prices. Clearly this isn't the case with providers of social care, because the barriers that deter (being handed a lawsuit for malpractice, incurring capital costs that necessitate such steep charges) would not apply in a situation in which an elderly relative needs a couple of carers, and there being 2 willing family members ready to care for her, and badly needing the money (with her badly wanting the money to go to them rather than into the hands of excessive care firms).

That this can’t happen, and that elderly people are held captive in this way, gives indication that important alternatives (competition to drive down prices, or relatives or friends willing and able to take on the role) are being suffocated – and suffocation in the free market is seldom a healthy thing.