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Milton Friedman Sparring

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Robert Kuttner attempts to debate Milton Friedman


MF: ...in the case of medicine, I would really like to see, and I wish I were competent myself to do it myself, a comparative study between dentistry and medicine.

RK: But dentistry is peripheral. It’s a very small fraction of total health spending.

MF: A very small fraction with exactly the same kind of problems, and I would like to know whether there has been any less technological development in dentistry than there has been in medicine, whether costs have gone up anything like in medicine. They all have the same kind of problems. The key problem of medicine is third party payment. Nobody pays his own bills.


Read the whole piece. The way I see it, Kuttner ends up sputtering. Near the end, he talks about the real income of doctors being down from 1950. This is almost certainly false, although I do not have a definitive data source. this report says that doctor fees rose 43 percent faster than inflation from 1950-1977. My guess is that since 1977 doctor fees have at least held their own relative to inflation. For Kuttner to be correct, they would have to have increased much more slowly than other prices over the past 25 years.

Friedman is rightly regarded as one of the best debaters in the profession. His contrast of dentistry and medicine is an example.

For Discussion. If you could argue with Friedman on any of the positions he takes in this article, which position would it be and what would be your argument? (This question is for people on the pro-government side of the Friedman--I'm not so interested in libertarians nit-picking.)

UPDATE: Alex Tabarrok reminds me of another example of free-market medicine.


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COMMENTS (17 to date)
daveg writes:

Cleary, paying out of pocket is superior to third party pays. The problem is how to get to there from here without an "explosion."

I call it the "unwinding clock" principle or "how do you let go of a gushing fire hose?"

Theoretical economists know that paying out of pocket is superior to the current system (and national health care).

But the question they can't answer is how to get from what we have now to a working out of pocket system without:

a) unfairly harming many who have planned and relied on the current system;
b) allowing some manipulator or corrupt entity to scam the transition for big bucks and causing a melt down of the system;
c) creating other conditions that make the transition politically unacceptable.

This is the difference between theoretical economics and applied economics combined with politics.

In this case, the latter is far more complex than the former.

That said, MF makes a great case for free market medical care by considering dental care. Another example is the supplement industry, which seems to satisfy consumer need without having third parties pay. And the supplement industry does this with products that have questionable effectiveness.

Why can't the medical profession, with proven effective treatments, make it in the free market?

spencerS writes:

The big difference between dentistry and medicine is that in dentistry you always have the option of having all your teeth pulled and replacing them with false teeth for a few hundred dollars. This places an upper limit on dental expenses that is not present in medicine. Consequently, the average middle class faimily is not faced with the potential of financial ruin from dentistry that they are facing if they catch cancer or some similar disease. So the analogy between dentistry and other medicine Uncle Milton is making is just a case of comparing apples and oranges. They are two very different situations. The difference is that advances in medical technology has made the financial risks of medical treatment essentially open-ended while the financial risks from dentistry has retained a low cap.

In education Uncle Milton is making the same case that I made a few weeks ago. No one has been able to improve on the basic model of one-on-one teaching with an upper limit of some 20 to 30 students per teacher. this is what he said and what I also believe. There are thousands of private schools in the US and they all use essentially the same education model and teacher training as public schools. No one has been able to demonstrate that there is any difference between public schools and private schools except that private schools can reject unsuitable students. Until someone does this all the arguments about private schools being superior is strictly pie-in-the-sky speculation
whether it is dome by an anonymous commentor on this blog or someone as reknown as Milton Friedman. Yes, an individual can get a better education by changing schools, but the mass of students from poor home environments will not be helped.

He is doing the same thing over and over again. Drwaing poor analogies that he has developed over the years that the reporter does not know enough to dipute. But they are still false analogies that may have the potential to be correct, but as of yet there is little evidence to show that they are correct.

spencer writes:

there you go again -- speculating about facts.

You are a PhD. economist from a highly respected school. why cann't you ever go to the trouble to see if any of the facts you keep speculating about are right or wrong. It should be a very easy task to find data on the average real income of doctors. why not do that rather then say it is almost certainly false? Doctors fees have to pay for much more then the doctors salaries and we know they have to spend much more on equipment and medical technicians, let alone insurance then they did in 1950. So there is little reason to think that changes in doctors income would be tightly correlated with changes in their fees.

Javier writes:

This doesn't have anything directly to do with health care, but I thought this was telling:

RK: No, I don’t have necessarily have confidence in government, but I think rather than just concluding that the remedy for healthcare not being a good subject for the free market, is just to say well that’s too bad, I think you’ve got to work harder at having the government to do what is has to do better. And I think, ironically enough, the Federal Reserve is one of the proofs of the pudding, because that, after all, is part of the government, and it has learned some things over 70 years.
Notice that the one example Kuttner gives of a government institution that has "learned" something is in fact a technocratic agency which is largely insulated from elections and the normal political process.
Javier writes:

Don't mean to get off topic, but couldn't quite let this slide:

No one has been able to demonstrate that there is any difference between public schools and private schools except that private schools can reject unsuitable students.... Yes, an individual can get a better education by changing schools, but the mass of students from poor home environments will not be helped.

I beg to differ. Take a look at Caroline Hoxby's work for starters (and there is a lot more out there). In randomized studies of voucher programs, private schools appear to do at least somewhat better than public schools--the difference is not dramatic, but it's there. More importantly, private schools appear more productive than public schools. This is from the following research paper:

These spending numbers...suggest that the voucher schools were 298 percent more productive. When interpreting this number, remember that we have already controlled for differences in student ability and motivation through the randomization. Also remember that voucher students were never the richer and easier-toeducate students in the public schools. Even if we think that the 298 percent measured difference in productivity is somewhat off, it is very unlikely that the true productivity difference is zero or small.
Also note that voucher programs typically make public schools more competitive as well.

Roger M writes:

I would argue with Friedman about freeing the demand side of the healthcare cost equation for these reasons:

1) For free markets to work, consumers must have choice. They must be able to do without a purchase or switch to an appropriate substitute if they deem the cost to be to high. But consumers can't choose not to purchase healthcare when an appendix ruptures, or when a heartattack or cancer strikes.

2) The price of healthcare will continue to rise if we do nothing about the supply side. If you visit this site: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/PieChartSourcesExpenditures2003.pdf, you'll see that hospital care and physician services account for 53% of all healthcare spending. The AMA limits the supply of surgeons via its control over medical schools and unnecessary regulations. In addition, the cost of medical school is insane. The first causes surgeons to earn more than they would in a free market, the second raises their fees so they can pay for med school.

Hospitals have the opposite problem--too much capacity. Excess capacity in most industries lowers prices, but with hospitals, because consumers don't have a real choice to refuse purchases, excess capacity raises prices as the hospitals spread more fixed costs over fewer patients. The situation is not much different from that of the electric utility industry where excess capacity raises prices due to state-enforced monopolies.

ed writes:

OK, I'll take issue with 2 things MF said.

MF: [Talking about why medical expenditures have risen] Every other technological improvement lowers costs. What technological improvement raises costs?

He's conflating "cost" and expenditures. Expenditures on computers have risen, too, but because technology has improved, not because the "cost" of computers have gone up. The real "cost" of health care has fallen as well...if I had cancer I'd much rather pay todays prices for todays care than 1960 prices for 1960 care.

You know there has been absolutely no improvement in the education field in two hundred years. We’re teaching kids the same way we did two hundred years ago. And that’s ridiculous.

First of all, I think there's are big differences from 200 years ago. We do more than read the Bible, for example. And if he's right, why haven't there been more changes in College education, where there is a robust market?

But a big hooray for this:

MF: I’m not an expert on that area. I don’t know what those amendments were. You’ve got me out of my depth

If only the babbling heads on TV could ever realize when they don't know something.

Roger M writes:

One way technology can increase costs in healthcare goes back to my point on hospitals being able to spread fixed costs over fewer patients. If a hospital purchases a very expensive MRI, for example, and doesn't have enough patients to justify it, it uses it in cases where it otherwise wouldn't, and it raises the prices of other services, such as x-rays, to pay for it. Since hospitals compete on services, but not on prices, they have an incentive to acquire the latest technology, rather than cooperate and share with other hospitals. A large part of the increase in hospital costs is due to excess capacity in high tech equipment.

Robert writes:


One way technology can increase costs in healthcare goes back to my point on hospitals being able to spread fixed costs over fewer patients. If a hospital purchases a very expensive MRI, for example, and doesn't have enough patients to justify it, it uses it in cases where it otherwise wouldn't, and it raises the prices of other services, such as x-rays, to pay for it. Since hospitals compete on services, but not on prices, they have an incentive to acquire the latest technology, rather than cooperate and share with other hospitals. A large part of the increase in hospital costs is due to excess capacity in high tech equipment.

If this is true, that there is overcapacity in high-tech diagnostic equipment, and that this is a redundancy of competition, then the shrewd entrepreneur could take advantage of this by buying the MRI and selling the service to patients from any hospital, and undercut the cost that any given hopsital experiences in providing the service for itself.

Roger M writes:

...the shrewd entrepreneur could take advantage of this by buying the MRI and selling the service to patients from any hospital...

Sounds logical, but why doesn't it happen? Again, hospitals don't compete on costs, but on services and equipment. Hospitals don't advertise their prices, but do advertise their equipment. Being the only hospital in town with a new technology gives a hospital a competitive advantage. Why would it share? And, it benefits the hospital to have the equipment in house due to the transaction costs (and the costs to its public image) of transporting the patient to another facility just for the use of that technology.

James writes:

Roger M,

You write,

"For free markets to work, consumers must have choice. They must be able to do without a purchase or switch to an appropriate substitute if they deem the cost to be to high. But consumers can't choose not to purchase healthcare when an appendix ruptures, or when a heartattack or cancer strikes."

Do you believe that working markets require that consumers have the option not to purchase at all? I ask because the market for groceries seems to work, despite the fact that I can't choose not to purchase food when malnutrition strikes.

"Sounds logical, but why doesn't it happen? Again, hospitals don't compete on costs, but on services and equipment...."

What other possibilities did you consider and rule out? Why?

Roger M writes:

I ask because the market for groceries seems to work, despite the fact that I can't choose not to purchase food when malnutrition strikes.

You're right that the food market presents a similar dilemna, but the supply is deregulated to the point that the free market works well. For example, if I don't have the money to buy a lobster dinner, I can forgo it and eat rice and beans. A lot of people get by on less than $2/day in the world.

What would I recommend as an alternative?
On the cost of doctors, I would deregulate the supply of doctors by breaking the AMA stranglehold. That would increase the supply and reduce the costs of training doctors. Is there a good reason for requiring a bachelor's degree before going to medical school?

On the oversupply of technology and beds in hospitals, I honestly don't know what to do. I suppose forcing hospitals to report prices might encourage them to compete on price. Currently, they seem to collude on prices. Consumers need a tool to compare prices and quality of hospitals in the way Consumer Reports does other things. But then, for consumers to care, they would have to pay more of the costs as opposed to having those costs hidden by insurance and government.

Zac writes:

A paper on the market for physicians in the 20th century by Tenerelli and Rosen: here.

Real incomes for physicians are higher now than in 1950. However, they have pretty much flattened out since 1970. You can credit this to a vastly increase supply of medical professionals, increased insurance/litigation/licensing costs for physicians, the expansion of group medical insurance, Medicare, and most recently a focus on cost-containment for firms offering health benefits.

Anyway, this is not great loss. Doctors provide very little service in terms of results, especially when you consider their non-licensed counterparts like EMTs can typically provide the same services at far less cost.

Let's give your guy the benefit of the doubt here and suppose he meant that physician real income GROWTH is lower now than in 1950. This is true, as the first derivative of real income was positive then and negative now.

Therein lies a problem: physician real income growth has halted, but doctor fees and total healthcare costs have climbed precipitously. To boot, the marginal expenditure on medicine has no effect on health. I'd feel better if rising health costs could be explained away by rapidly increasing doctor fees. A transfer is better than flushing money down the proverbial toilet any day of the week.


Concerning dentistry - its quite interesting to look at this in light of the growth of consumer-driven health care. People are too quick, I think, to underestimate how patients could change their behavior in the market for medical services if they shared more of the cost (a traditional leftist argument is that people cannot shop for health services, which can be dismissed out of hand imho, but the debate continues). Dentistry has had success with high-deductible insurance for years; patients exhibit consumer behavior given the right incentives.

Robert Schwartz writes:

Argue with Milton Friedman? Are you kidding?

Funny thing is that I have argued with Milton Friedman. When I was undergrad at the U of Chicago a generation ago, Milton Friedman was a faculty member. He seldom taught undergraduate classes, but he often gave lectures and engaged in other campus activities.

It was a contentious era, and Mr. Friedman was a contentious guy. On a couple of occasions I was a member of groups of students who argued with him after lectures. I don't remember the subjects, but I do remember that he was always coherent, polite and to the point. I was impressed. I may not have agreed with him at the time, but I learned a lot from him and it has affected my subsequent intellectual and political development.

If I were to meet him again, I would not argue with him, but I would thank him for his arguments long ago.

Emma Eckstein writes:

Here's another popular procedure whose price has fallen even more than LASIK. It is not covered by insurance or heavily regulated. You can even perform it without the patient's consent!

According to the DNA Diagnostics Center, the cost of DNA testing was more than $1,000 in 1990. Today a quick search in froogle yields an average price of about $150 for a paternity test. I doubt it has as high a satisfaction rate as LASIK, though.

Chris Bolts writes:
In education Uncle Milton is making the same case that I made a few weeks ago. No one has been able to improve on the basic model of one-on-one teaching with an upper limit of some 20 to 30 students per teacher. this is what he said and what I also believe. There are thousands of private schools in the US and they all use essentially the same education model and teacher training as public schools. No one has been able to demonstrate that there is any difference between public schools and private schools except that private schools can reject unsuitable students. Until someone does this all the arguments about private schools being superior is strictly pie-in-the-sky speculation whether it is dome by an anonymous commentor on this blog or someone as reknown as Milton Friedman. Yes, an individual can get a better education by changing schools, but the mass of students from poor home environments will not be helped.

So, since both public and private schools provide the exact same product, government should be the one to do it? That's a fallacious argument. Perhaps the reason schooling has not changed is because schools, whether private or public, don't have to directly compete with one another and so you don't have an idea of what curricula works besides the one that's been in existence for 200 years.

quadrupole writes:

Chris Bolt writes:

In education Uncle Milton is making the same case that I made a few weeks ago. No one has been able to improve on the basic model of one-on-one teaching with an upper limit of some 20 to 30 students per teacher. this is what he said and what I also believe. There are thousands of private schools in the US and they all use essentially the same education model and teacher training as public schools. No one has been able to demonstrate that there is any difference between public schools and private schools except that private schools can reject unsuitable students. Until someone does this all the arguments about private schools being superior is strictly pie-in-the-sky speculation whether it is dome by an anonymous commentor on this blog or someone as reknown as Milton Friedman. Yes, an individual can get a better education by changing schools, but the mass of students from poor home environments will not be helped.

Even if I spot you the one-on-one teacher teaching a classroom with 20-30 students as the optimal teaching model (which I don't believe) there is still HUGE room for the private sector to improve on public schools.

First, on average in the US 61.5% of elementary and secondary education spending in public schools is spent in the classroom (my apologies, for not linking to a primary source, the source linked to seems to be munging a data file from the national center for education statistics, but I can't find better data). I strongly suspect the private sector could produce a better 'tooth-to-tail' ratio. If you could just drive non-instructional costs from 38.5% to 20% ( more inline with private sector overheads) you could provide the same level of classroom spending at an 18.5% discount, or a 30% increase in classroom spending at the same cost.

Second, teachers in the public school are very expensive and the educational outcome they produce is poor and declining. The average hourly compensation cost for a public school teacher according to the BLS as of Sept 2005 was $47.55 per hour. By way of contrast, the average for management, professional, and related private sector employees was $42.84 per hour. Or to put it differently, the compensation costs for teachers are 110% of those for other professionals and management. I strongly suspect that the private sector can bring those compensation costs inline. I also suspect the private sector could and would attract and retain better quality instructors, based purely on what I have seen in terms of the manner in which teachers are treated in public schools vs how similarly paid professionals are treated in other private sector work.

Just a few thoughts :)

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