So, government CAN lead the market?

(Disclosure: I work for UnitedHealh)

A note on the economics implications of UnitedHealth’s announcement Monday that they would retain key provisions of “Obamacare” even if the Supreme Court strikes it down… Other insurers quickly followed UnitedHealth. It’s hard to image a more clear case of government legislative action being a key to drive the markets forward in a direction that the markets (consumers) want, but which negative competition cycles prevent suppliers from providing until “central planning” coordinates the action of the markets.

This directly contradicts important points underlying the laissez-faire, conservative hypotheses of the Chicago School, or “Freshwater Economics”. This is a very good demonstration of a Nash Equilibrium (ie of the movie “A Beautiful Mind”) in the real world – none of the insurance companies would step out of the equilibrium that had developed and embrace coverage of, for instance, students up to age 26, or comprehensive preventative coverage, because doing so would allow the other insurers to under cut them on price. Covering these is better for the companies because it increases revenue potential and customer (individuals) satisfaction, but no company can be the first one to increase standard coverage. The move must be made together or not at all. That’s why it’s called an equilibrium – the market gets stuck – but the unexpected part that won John Nash a Nobel Prize is the realization that the market can get stuck at a less-than-optimal state because of a lack of coordination.

Similarly, UnitedHealth stated that they will not extend pre-existing condition coverage unless the law survives challenge because, as CEO Stephen Hemsley explained, one company alone can’t sustain that extension of benefits. That, too, is a Nash Equilibrium, but one UnitedHealth’s executives have apparently calculated is not likely to be mutually embraced (and/or sustained) by the other insurance companies unless federal law requires it. It may also be different in the sense that the other provisions clearly increase revenues, while covering new patients with pre-existing conditions tends to simply increase cost-risks for the insurance provider. Hemsley didn’t say covering pre-existing conditions was a bad idea in theory – he simply said no one company can take that one on in this market, social norms as they are.

In the end, the reasons for continuing – or not continuing – specific provisions of Obamacare aren’t nearly as important as seeing this for what it is: a situation where the public – coming together and asking “What ought to be?” – “What is in the public good?” – drove toward a “fiat” coordination of corporations – and achieved something that the corporations agree is good business, too – but they could not do on their own. The only reason they are able to keep the provisions they have announced is that they were required to adopt these provisions already. Now that they’ve all put in the work to enact these provisions, stepping back would be a net-loss for everyone.

The conclusions here were obvious to anyone even remotely current on Game Theory or Behavioral Economics – the “rational” models of economics that are the core belief of conservatives, the Tea Party, Ron Paul libertarians, and Ayn Rand Objectivists – are simply wrong. They are stuck in a simplistic, idealized concept of human beings that asserts that efficient markets must be free of all government interference – that the market is always the most reliable arbiter of what is good for humanity – and that individuals are best served not by coordinating their interests with the interests of others, but by religiously seeking their own self-interest, and when everyone seeks their own self-interest the best of all possible worlds will inevitably be achieved.

No, I’m really not mis-characterizing anything here. If you didn’t realize that this is the fundamental principal Romney and The Republicans always come back to, you’ve done yourself, your nation, and the world a disservice by not getting educated on what’s really going on in the realm of political ideas. (Whether Romney or the Republicans actually believe these ideas is a separate issue. So is the question of whether theypracticethese ideas reliably, regardless of whether they believe in them or not. In truth, however, I’d give a 66% chance that Romney is actually a pragmatic, Machiavellian plotter, and he doesn’t care about these principles except to the extent that expressing them reliably earns him a certain proportion of votes…. But we’ll see… if he wins…)

In contrast, the problem with this notion that freedom of action always leads to automatic correction is simply wrong. It’s like stop-lights. A “free” road without stoplights or speed limits and drivers that determinedly try to advance their own pole-position would not produce more optimal traffic patterns – it would actually produce more congested patterns, more “accidents”, and road intersections would be a nightmare. But this is not to say that all stop-lights are good stop-lights. Stop lights that automatically adjust their timings to the volume and direction of traffic are better than static timings. Better yet, freeway-style roads with overpasses and ramps are ways of “systemetizing” the “rules” in a way that gets very close to what conservatives think of when they think of the benefits of unrestricted freedom-of-action. Their problem is, apparently, that they are somewhat bad at seeing how to convert the ideal into a practical reality. They latch on to the principle that “freedom of action” is better than obstacles, and then try to apply it everywhere they see an obstacle – forgetting that sometimes those obstacles are the very things guaranteeing the “freedom-of-action” to other cars (people) moving in a very different pattern.

A reasonable level of “centralized planning” and coordination of the markets is good – and “the government” is simply the name we give it when people (more or less) democratically come together and try to ask not, “What’s in my best interest?” but “What’s in the best interest of everyone?”. It doesn’t actually have to be “The U.S. Congress” doing the “legislating” – “private” standards bodies, for instance, can often achieve similar results in some cases. But there is no principled reason why the (actual) government must not be the body that formulates new rules when undesirable equilibrium develop, besides the same factors that apply anytime public or private rules are formulated (such as rules that are clearly overly-broad right from the start, as well as rules that are not systematically and dynamically adjusted over time).

This division – the change from “what’s in my self-interest” to “what’s in everyone’s best interest?” is supposed to be the core conceptual division between “public” and “private”, “government” and “market”. It seems at least one of our political parties is consumed with an entirely different concept of civics – and their ideas have been clinically shown to be destructive time and time again in the sense that they lead society – not upward to better and better institutions – but into stagnant, self-reinforcing downward cycles of cynicism.

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About stormculture

In pursuit of reality.
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