Arnold Kling  

The Socialist Calculation Debate, 2010 Edition

Mandela and the Communists... Boudreaux on Free Trade and Cu...

Joseph Antos writes,

The problem for a government price controller is that he can never know when the price structure is "right." He can know when physicians are unhappy with their prices because they will complain, but that does not necessarily mean that those prices should be raised. He cannot know when prices are too high, because physicians benefiting from that mistaken generosity will not complain. The bias is always to raise prices, not lower them.

Read the whole thing. It is difficult to excerpt.

The sad thing is that so few self-styled experts understand the socialist calculation issue. Imagine what it would be like if public policy schools taught courses in Austrian economics (of course, that would undermine the status of most public policy schools).

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COMMENTS (13 to date)
david writes:

Singapore operates state-owned and state-run polyclinics concurrent to the private healthcare market, which seems to resolve the informational difficulty and the exploitation that is alleged to exist.

wcudon writes:

The Socialist Calculation Debate, 2010 Edition

I disagree with the statement that a government price controller can never know when the price structure is "right". I say this because in essence the price structure will never be "right". Someone will always benefit and like the structure while others will be miserable and hate the current state of the prices they have to endure. An example of this is the Medicare plan. It spends alot on specialists, but not enough on primary care. If people always had to see a specialist this would be a benefit but since most people see their primary physician when they have issues only the doctors benefit from the current allocation of funds for Medicare.

Prices should not always rise to appease some but rather the complaints should be taken into account from both sides and an equitable decision should be made.

liberty writes:


No, it does not entirely solve the problem. First, the public providers will affect the costs of the private providers, and influence the prices at which they are able to sell. This is fine if the public providers are only providing to those in need and their provision is a market correction -- however, if political pressures or lack of information about who is in need causes a bubble within the public market, then the affect on the private market will distort the price structure there. Then when the public providers look to the private market for prices, they will be misguided.

The longer that an initial price distortion has to affect the market the worse the outcome, as it snowballs. This has already happened in health care, as Medicare has affected private health care markets, and costs have ballooned, which some prices have been fixed low, etc. Prices in health care are already wildly distorted.

However, I agree that this has much greater potential than public provision alone, both for informational reasons and motivational (competition, innovation, etc) reasons. I would argue that funding (e.g., vouchers) instead of public provision would be even better - for several reasons.

Smiling Dave writes:

"Right" in this context does not mean "fair" or "that will which make both sides [or even one side] happy".

It means "that which will make maximum use of the resources available".

Can a govt price controller set the price for a doctors visit in such a way that exactly the right number of people decide to become doctors, not too many and not too few? I didn't think so.

Joseph K writes:

wcudon says,

I disagree with the statement that a government price controller can never know when the price structure is "right". I say this because in essence the price structure will never be 'right'.

This is a nonsensical argument. If there is no right price, then clearly the government can't know the right price. Your argument amounts to saying that biologists can accurately calculate the average height of a leprechaun because leprechauns don't exist.

Even then, your assumption that there is no right price is fallacious. The right price is the price where supply meets demand. If it's too high there's an oversupply of doctors and Medicare is spending too much taxpayer money. If it is too low, there's an undersupply of doctors and patients have too hard a time finding a doctor. You seem to think the only right solution is the one that makes everyone happy (and you are right there is no price that would do this). In fact, though, the right price is the one that best balances opposing trade offs.

Michael writes:

It is difficult to argue that some tweaking of reimbursement or coverage rates would make pricing any better, given that the government also (in a curiously self-defeating way) controls the supply by legalizing professional monopolies for every professional group, including physicians, nurses, and Arnold's favorite, physiotherapists. If the government grants huge rents by legalizing supply-choking monopolies, and then repeatedly caves in to demands by those groups for additional territorial privilege, how is any discussion of a fair or competitive price even possible? It isn't.

I would argue (and frequently do) that a huge piece missing in this is our ability to measure the marginal value of health care itself. Health care services account for only a small amount of the variation in health status between individuals, and yet our economic policies treat it as if it were the only thing keeping us alive.

As for the Singapore example provided by wcudon, that is actually a great example of government inefficiency. Normally governments as purchasers have a huge scale advantage in negotiating prices, so they should be able to get less. But I have a cousin who is a surgeon in Singapore, and the only difference for him is where to send the bill.

AndyB writes:

I must agree that a government price controller can never really know when a price is at the right level. It is natural for someone to have financial gain on a service or a product. If the price is to high, it is obvious that the producer will make financial gains. This of course is at the expense of the consumer.
Through this model, it can be assumed that the goods in question are necessities, and the consumers have to by the product at any price. This would make the product inelastic with a little amount of substitutes.
The example of health care falls under this premise, most people will buy medication or medical services at any price. The consumer has no choice but to buy medication at high prices especially if there is no generic brand.

Hyena writes:

Really? I rarely see anyone argue that we should actually set prices.

MernaMoose writes:

Huh. I thought setting prices was pretty much what they've been up to with health care in MA. Soon to be ramped up nation wide.

MernaMoose writes:

Not to change the subject, but La La Land is far less depressing than dealing with reality and all those hard, cold facts. Two questions:

1) Why can't (doesn't) a party evolve, whose mantra is "Max out economic growth so we can help the greatest possible number of poor people." Idea is that government should aim to maximize tax revenues over time, so as to provide the maximum level of social welfare over time.

I suspect the answer is, because liberals aren't really and actually interested in helping the poor. Their true agendas lie elsewhere.

2) Is it possible to develop government institutions in such a way as to make them want to maximize economic growth, in order to maximize their own tax revenue stream?

That seems hard. But maybe, not impossible.

Does anyone know if anything like this has ever been tried, anywhere in history? I'm thinking through all the history I've read and don't come up with anything.

MernaMoose writes:

Hmm. How about a modern day Alexander the Great, who fosters max growth in his domains, so as to afford an army to conquer his neighbors with. Which he will then impose max growth policies on, and in turn afford an even bigger army, with which to conquer more and bigger neighbors.

Then we can all go see the movie on how he conquered the world with capitalism.

I'm sure this will offend libertarian sensibilities in fundamental ways. But tell me where there's ever been a nation in all of history that wasn't built on one contradiction or another.

The problem isn't that this idea couldn't be made to work, at least in principle.

liberty writes:

MernaMoose : see the British Empire.

(Not perfect as an example, but a large step in that direction in relative terms).

MernaMoose writes:


I hadn't thought of the British Empire that way, but you've got a point.

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