I argue that there is something about healthcare services that makes them fundamentally unsuited to be provided directly to the public by for-profit business.
That, in general, there is a kind of services that are unsuited for for-profit business to provide directly to the public, and a kind of services that are indeed suited for for-profit business to provide.
And that, in general, we can say the same thing of government: there is a kind of services that are unsuited for government to provide, and a kind of services that are rather suited for government to provide.
I propose a rather simple principle for deciding either way. It lies in the question: do you have a choice about the service? Can you choose what to buy, when to buy, how much to buy, how often to buy - or not buy at all?
If yes, for-profit business does a better job of providing it (and government does NOT). If no, it is government that rather does the better job (and not for-profit business).
I develop this argument in a series of blog posts here on Wide Avenue.
For convenient navigation, I provide a series of links to the posts. Please follow the links in sequential order:
BUSINESS, GOVERNMENT AND SERVICES
SERVICES, PROPORTION AND PRICE
MARKET AND AREAS OF NO-CHOICE
DISTORTIONS
SUMMATION
SUMMATION
To sum up, the proper kind of services for business to provide are services that provide gain of state (or, what is the same, services in areas of choice).
All the familiar things that businesses do can be seen as efforts to provide gain of state: making cars, producing movies, publishing books and music, running restaurants, staging sporting events and fashion shows, building and managing vacation resorts.
Business is unsuited to provide, at least directly, to the community or to individuals, services for preventing loss of state or restoring lost state. It makes no sense for business to provide commercial fire-fighting services to the public.
Equally, the kind of services that it is appropriate for government to provide are services in areas of no-choice.
That is, the proper kind of services for government to provide are services that prevent loss of state or restore lost state.
All the familiar things that government does can be seen as efforts to MAINTAIN state, and RESTORE state: passing laws, including laws to protect the environment; providing courts of law; police; national defense; disaster relief; firefighting services; regulating business, so that business activities do not bring loss of state to anybody, including antittrust regulation that checks businesses from preventing
others from gaining state.
As society progresses, the number of areas of no-choice increase - think highways, electricity, internet; the need to prevent loss of state and restore lost state spreads to newer and higher areas of society; if technology makes new things possible, new rules have to be framed and enforced to maintain state; the role of government of necessity increases. This increase is not the same as expansion of government role in society - it is simply a consequence of the expansion of the areas that government is - and always has to be - responsible for.
All the familiar things that businesses do can be seen as efforts to provide gain of state: making cars, producing movies, publishing books and music, running restaurants, staging sporting events and fashion shows, building and managing vacation resorts.
Business is unsuited to provide, at least directly, to the community or to individuals, services for preventing loss of state or restoring lost state. It makes no sense for business to provide commercial fire-fighting services to the public.
Equally, the kind of services that it is appropriate for government to provide are services in areas of no-choice.
That is, the proper kind of services for government to provide are services that prevent loss of state or restore lost state.
All the familiar things that government does can be seen as efforts to MAINTAIN state, and RESTORE state: passing laws, including laws to protect the environment; providing courts of law; police; national defense; disaster relief; firefighting services; regulating business, so that business activities do not bring loss of state to anybody, including antittrust regulation that checks businesses from preventing
others from gaining state.
As society progresses, the number of areas of no-choice increase - think highways, electricity, internet; the need to prevent loss of state and restore lost state spreads to newer and higher areas of society; if technology makes new things possible, new rules have to be framed and enforced to maintain state; the role of government of necessity increases. This increase is not the same as expansion of government role in society - it is simply a consequence of the expansion of the areas that government is - and always has to be - responsible for.
DISTORTIONS
Examining the distortions when market principles are applied in areas of no-choice.
By Desaraju Subrahmanyam.
See the post 'Business, Government and Services' for an introduction to the terms 'state', 'area of choice', 'area of no-choice'.
ABSTRACT
Approaching services in areas of no-choice in the same way as services in areas of choice distorts the service. The supply, or the price (or both) become distorted. We illustrate these distortions through the California power crisis of the early 2000s. We then discuss the distortions in healthcare services. We conclude with a discussion of areas that are seemingly areas of no-choice, food and general insurance, which are almost completely provided in society through markets, yet do not suffer from distortions.
WESTERN ENERGY CRISIS
In the mid-90's, California began changing its power sector by ushering in deregulation. The objective was to increase competition and bring down prices. New rules called for the Investor Owned Utilities, or IOUs, (primarily Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric) to sell off a significant part of their electricity generation to wholly private, unregulated companies. The buyers of those power plants then became the wholesalers. The incumbent utilities were still responsible for electricity distribution. They were now required to buy the electricity that they used to own themselves, through a newly created day-ahead only market, the California Power Exchange (PX). A total of 40% of installed capacity was sold to what were called "independent power producers", which included Mirant, Reliant, Williams, Dynegy, and AES.
But deregulating the producers of energy did not lower the cost of energy. Deregulation did not encourage new producers to create more power and drive down prices. Instead, with increasing demand for electricity, the producers of energy charged more for electricity; they used moments of spike energy production to inflate the price of energy. Signs of trouble first cropped up in the spring of 2000 when electricity bills skyrocketed for customers in San Diego, the first area of the state to deregulate. Experts warned of an impending energy crisis. The trouble spread statewide that summer, and Governor Davis began asking the Federal regulator FERC to probe possible price manipulation by power suppliers. In January 2001, energy producers began shutting down plants to increase prices. When wholesale electricity prices hit new highs and the state began issuing rolling blackouts, Governor Davis issued a state of emergency on January 17, 2001. This officially came to be called the Western Energy Crisis.
At no point during the crisis was California's energy supply [the sum of in-state generating capacity and out-of-state imports] less than demand. But California's energy reserves were low enough that during peak hours the private industry, which owned the power-generating plants, could effectively hold the state hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they were forced to purchase electricity on the "spot market", where private generators could charge astronomical rates. Even though these rates were semi-regulated and tied to the price of natural gas, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Manipulation by the industry of natural gas prices resulted in higher electricity rates.
AN EXPERT'S TESTIMONY
S. David Freeman was appointed Chair of the California Power Authority in the midst of the California crisis. He had 40 years of experience with the electric power industry as a regulator, an official in federal and state government, and as the manager of large public utilities. In testimony submitted before the Subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation on May 15, 2002, he made the following statements:
"There is one fundamental lesson we must learn from this experience: electricity is unlike anything else in our economy. It is truly the lifeblood. Ordinary consumers and businesses alike CANNOT DO WITHOUT IT for even an instant [emphasis added]. Reliable, smooth electricity at a reasonable, predictable price is an absolute necessity. [This] makes opportunities to take advantage of a deregulated market endless. If Murphy’s Law were written for a market approach to electricity, then the law would state 'any system that can be gamed, will be gamed, and at the worst possible time.' And a market approach for electricity is inherently gameable. Never again can we allow private interests to create artificial or even real shortages and to be in control.
"The words competition and deregulation are seductive. They sound great but the reality we found in California was quite different. A public utility industry whose books are open to public inspection, who are legally responsible for providing reasonably priced electricity, and who did just that for decades, were replaced by companies that operated in secrecy, are accountable to no one (apparently not even their shareholders or employees), could sell or withhold power as they pleased and had no obligation to build new plants.
"Proponents continue to talk of the potential benefits of deregulation. In California we learned who got the benefits - it was the power marketers. As for the consumers, in 1996 when deregulation was launched, the consumers were promised a 20% rate reduction by April, 2002. Instead the consumers are paying rates that are 40% higher!
"Consumers of all sizes cannot be well served by blind faith in the market. Any market for electric power generation must be combined
with sufficient governmental participation to assure that the lifeblood of our society doesn’t operate in ups and downs. Such volatility and shortages may be acceptable for oranges or stocks but society simply can’t tolerate it for electricity. It is a public good that must be protected from private abuse. The system of public utilities with a duty to keep the lights on at just and reasonable rates set by regulators served this country rather well during most of the 20th century."
COMPETITIVELY PRICED ELECTRICITY
The distortion in electricity 'markets' is not limited to the Western Energy Crisis.
In an article published November 6, 2007 ("Competitively Priced Electricity Costs More, Studies Show"), the New York Times revealed that retail electricity prices had risen much more in states that adopted competitive pricing than in those that had retained traditional rates set by the government.
The source of the data was the Energy Information Administration. A non-profit advocacy group, Power in the Public Interest, used the data to compare prices in 13 states and Washington, all of which have adopted market pricing for industrial users, with the rest of the nation.
The difference in prices charged to industrial companies in market states compared with those in regulated ones nearly tripled from 1999 to 2007.
According to the New York Times, "The data are the latest to show that competition, which was promoted by big industrial companies and Enron as the best way to create competitive incentives to reduce prices, has instead resulted in higher and faster rising prices. Some big industrial customers have turned against the changes they once championed, saying that if markets produced lower prices they would favor them but that electricity auctions have not worked... In market states, electricity customers of all kinds, from homeowners to electricity-hungry aluminum plants, pay $48 billion more each year for power than they would have paid in states with the traditional system of government boards setting electric rates."
HEALTHCARE SERVICES
We can similarly see distortions in healthcare, which is approached as an area of choice here in America.
Healthcare in America is paid for, in general, and at least partly, by for-profit health insurance companies that sell insurance directly to the public; and it is provided, in general, by for-profit healthcare corporates. So there are actually two for-profit services at play for the public - the insurance service and the medical service. Both these services are distorted.
The distortions on the insurance side include denial of insurance coverage, bumping 'customers' from insurance coverage, denial of claims, densely-worded contracts, and business activity focussed on denial of insurance, bumping 'customers' from insurance and denial of claims (inflating administrative costs thereby).
Imagine a business investing its energies in DENYING service to customers, rejecting customers and chopping customers! It is a travesty, yet this is what health insurance companies do. Why? Because there is no genuine customer, and there is no genuine business!
The distortions on the medical side include unnecessary 'care', and sky-high 'prices' of care.
Unnecessary medical care takes the form of unnecessary tests and procedures, unnecessary drug prescriptions, even unnecessary hospitalization. Tests, drug prescriptions and hospitalization do not add value for the customer, they are not a legitimate provision of services for gain of state. Yet when provided by a for-profit business, they are 'billed' willy-nilly, exactly as if more of them meant more gain of state to the consumer, like a car packed with goodies, extras and doodads - in short, as if more is better. Doctors focus on billing when that focus has no relation to the requirement they have to cater to, which is to prevent loss of state and restore lost state.
In his book Shock Therapy for the American Health Care System, Robert Arthur Levine, MD points out that there are two factors that make up 40% or more of the health care dollars spent:
1. unnecessary care
2. administrative costs of insurance companies.
As for sky-high 'prices' - benchmark the prices paid for lab tests and pharmaceuticals in the US against prices paid in other industrialized countries, where there is no direct for-profit mechanism applied to healthcare. Compare the differences with area-of-choice products and services like cars.
The price of the drug (or the test) does not represent any gain of state to the consumer; there may be a high cost to creating it, but this is not necessarily the case, and when it is not, the high price reflects one thing and one thing only - the lack of choice or the helplessness of the consumer over using the drug.
There is not a single known case of a country that has a largely free market, for-profit healthcare system organized on the lines of, say, the US auto industry, that delivers decent healthcare to the general population (to the common man, or the Average Joe / Jane) in the same way that decent autos are delivered.
FOOD AND CHOICE
If applying market principles to areas of no-choice distorts the supply and the prices, why - it can be asked - is the food market not distorted? Is food not the biggest area of no-choice?
We argue that the food market escapes the prediction of the no-choice model because the food market is actually a food item market, and every food item is, to a large extent, an area of choice rather than an area of no-choice.
Food is - for civilized man - at once something that prevents loss of state (proximately by staving off hunger, and ultimately by repleneshing body energy) and something that brings gain of state (by sensual pleasure in the combination of taste, texture and temperature). Food available in the market caters at least somewhat to the gain-of-state aspect - its selling proposition at least in part is the gain of state it gives you. Of course the gain is different for different food items and markets - it is lower for 'basic' food items such as vegetables or bread, which in themselves offer lower gain of state, and it is higher for 'exotic' food items such as restaurant foods, which offer higher gain of state.
The principle of dimishing gain-of-state applies to food items - the consumption of any food item reduces the gain of state on the subsequent consumption of the same item (but different food items have different gain of states). However, we have to eat 'food' - as distinct from any particular food item - everyday to prevent loss of state. The principle of diminishing gain-of-state does not apply to 'food' (that is, marginal utility is meaningless for 'food'). The net effect is that we eat a variety of food items, and the extent of the variety is given by what we can afford. The gain-of-state aspect of food translates into demand for a variety of food items, ACCORDING TO THE CURRENT LEVEL OF THE ECONOMY. On the other hand, people will eat the same food item everyday when they eat to stave off hunger.
Insofar as food items provide gain-of-state, they are a legitimate area of business. But where there are food shortages, say on account of droughts or floods, and people are starving or dying of starvation, any item of food is needed to prevent loss of state; there people need food items to stave off hunger and death, not to enjoy the sensual pleasure of eating. Therefore, although many people may need food in such situations, that is not 'demand', and is not a legitimate area of business.
People have no choice but to eat food, but even in basic (raw) food-products there is some real choice, a real variety of options: you can eat wheat or rice or cereals or meat or nuts or vegetables or lentils or eggs or fruits or dairy products or fish - each has its own distinct economic, geographic and cultural characteristics: know-how, supply levels, sources. Further, foods like vegetables, lentils, fruits, meat and fish come in many varieties of their own. To stave off hunger you can eat any of these foods and you can eat them in any mix. This 'choice' comes from nature - both the nature that is out there, the environment, and the nature that is in here, human nature. The environment provides a wide variety of possible foods which humans harness; and humans are adapted to taking a wide variety of food.
(Economists call this variety of consumption options as 'substitute goods'.)
You can eat less KINDS of food, and more KINDS of food.
Further, within broad limits, you can eat less, and you can eat more (although you may not eat as much as you need to or want to). Food consumption has high proportionality of quantity.
This vast, powerful choice in the hands of consumers prevents distortion in the food market.
The other important point is that in the case of food, the choice of substitute goods is with the consumer - the consumer has choice over what to buy, how much to buy, when to buy, how often to buy - or not to buy at all.
Healthcare is not at all like this. if you get malaria you do not have a meaningful, economically distinct choice of 'a' or 'b' or 'c' or 'd' or 'e' to cater to it; nor can you make-do with some 'mix' of them. Even if there are substitute goods (alternative drugs or therapies), the consumer has no choice over what to buy, how much to buy, when to buy, how often to buy. He or she always has to buy what somebody else tells him to buy, and ONLY what somebody else tells him to buy.
(Food is a good illustration of 'gray area', which was described in the earlier post 'Business, Government and Services'. With food, the area of no-choice and the area of choice are not absolutely distinct; it is difficult to tell apart the two services except at the extremes. Whereas 'food', in the abstract, is an area of no-choice, any actual item of food is largely an area of choice. So if the food business escapes the prediction of the no-choice model, it is because, very likely, the food business actually services an area of choice and not an area of no-choice, or it services what becomes an area of no-choice only in an extreme sense and in extreme cases of shortage.)
GENERAL INSURANCE
The other area that escapes the prediction of the no-choice model is general insurance - that is, insurance for cars, homes, factories, farms, art collections and so on.
General insurance is a service for restoring loss of state, and therefore falls in an area of no-choice. But the market is not greatly distorted.
There are reasons for this. As we discussed in 'SERVICES, PROPORTION AND PRICE', there is magnitude of choice and no-choice. If your car requires a denting-painting job, there is loss of state, but not of high magnitude; correspondingly the force of no-choice is not very strong. It is possible to get by without restoring state for a few days or weeks. This helps to keep auto insurance (by and large) from becoming the horror story that healthcare is.
But there are other, perhaps more powerful, factors. For one, general insurance is almost entirely concerned with states that can be and are priced; thereby the price of restoring lost state can be derived from, and is limited to, the price of gaining state. For another, general insurance such as auto insurance is usually mandatory by law, which makes for a large, 'assured' customer base. These factors have a beneficial effect on both price and service.
Mandating that everyone buy insurance sounds innocuous, but as a principle it is a massive distortion of the market principle that the consumer has a choice between buying and not buying. However, it acts as a counter-distortion to the original distortion, and can be effective in making for a functioning market and service, as with auto insurance, or indeed, health insurance as in the Swiss system.
UP NEXT: Summation
By Desaraju Subrahmanyam.
See the post 'Business, Government and Services' for an introduction to the terms 'state', 'area of choice', 'area of no-choice'.
ABSTRACT
Approaching services in areas of no-choice in the same way as services in areas of choice distorts the service. The supply, or the price (or both) become distorted. We illustrate these distortions through the California power crisis of the early 2000s. We then discuss the distortions in healthcare services. We conclude with a discussion of areas that are seemingly areas of no-choice, food and general insurance, which are almost completely provided in society through markets, yet do not suffer from distortions.
WESTERN ENERGY CRISIS
In the mid-90's, California began changing its power sector by ushering in deregulation. The objective was to increase competition and bring down prices. New rules called for the Investor Owned Utilities, or IOUs, (primarily Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric) to sell off a significant part of their electricity generation to wholly private, unregulated companies. The buyers of those power plants then became the wholesalers. The incumbent utilities were still responsible for electricity distribution. They were now required to buy the electricity that they used to own themselves, through a newly created day-ahead only market, the California Power Exchange (PX). A total of 40% of installed capacity was sold to what were called "independent power producers", which included Mirant, Reliant, Williams, Dynegy, and AES.
But deregulating the producers of energy did not lower the cost of energy. Deregulation did not encourage new producers to create more power and drive down prices. Instead, with increasing demand for electricity, the producers of energy charged more for electricity; they used moments of spike energy production to inflate the price of energy. Signs of trouble first cropped up in the spring of 2000 when electricity bills skyrocketed for customers in San Diego, the first area of the state to deregulate. Experts warned of an impending energy crisis. The trouble spread statewide that summer, and Governor Davis began asking the Federal regulator FERC to probe possible price manipulation by power suppliers. In January 2001, energy producers began shutting down plants to increase prices. When wholesale electricity prices hit new highs and the state began issuing rolling blackouts, Governor Davis issued a state of emergency on January 17, 2001. This officially came to be called the Western Energy Crisis.
At no point during the crisis was California's energy supply [the sum of in-state generating capacity and out-of-state imports] less than demand. But California's energy reserves were low enough that during peak hours the private industry, which owned the power-generating plants, could effectively hold the state hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they were forced to purchase electricity on the "spot market", where private generators could charge astronomical rates. Even though these rates were semi-regulated and tied to the price of natural gas, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Manipulation by the industry of natural gas prices resulted in higher electricity rates.
AN EXPERT'S TESTIMONY
S. David Freeman was appointed Chair of the California Power Authority in the midst of the California crisis. He had 40 years of experience with the electric power industry as a regulator, an official in federal and state government, and as the manager of large public utilities. In testimony submitted before the Subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation on May 15, 2002, he made the following statements:
"There is one fundamental lesson we must learn from this experience: electricity is unlike anything else in our economy. It is truly the lifeblood. Ordinary consumers and businesses alike CANNOT DO WITHOUT IT for even an instant [emphasis added]. Reliable, smooth electricity at a reasonable, predictable price is an absolute necessity. [This] makes opportunities to take advantage of a deregulated market endless. If Murphy’s Law were written for a market approach to electricity, then the law would state 'any system that can be gamed, will be gamed, and at the worst possible time.' And a market approach for electricity is inherently gameable. Never again can we allow private interests to create artificial or even real shortages and to be in control.
"The words competition and deregulation are seductive. They sound great but the reality we found in California was quite different. A public utility industry whose books are open to public inspection, who are legally responsible for providing reasonably priced electricity, and who did just that for decades, were replaced by companies that operated in secrecy, are accountable to no one (apparently not even their shareholders or employees), could sell or withhold power as they pleased and had no obligation to build new plants.
"Proponents continue to talk of the potential benefits of deregulation. In California we learned who got the benefits - it was the power marketers. As for the consumers, in 1996 when deregulation was launched, the consumers were promised a 20% rate reduction by April, 2002. Instead the consumers are paying rates that are 40% higher!
"Consumers of all sizes cannot be well served by blind faith in the market. Any market for electric power generation must be combined
with sufficient governmental participation to assure that the lifeblood of our society doesn’t operate in ups and downs. Such volatility and shortages may be acceptable for oranges or stocks but society simply can’t tolerate it for electricity. It is a public good that must be protected from private abuse. The system of public utilities with a duty to keep the lights on at just and reasonable rates set by regulators served this country rather well during most of the 20th century."
COMPETITIVELY PRICED ELECTRICITY
The distortion in electricity 'markets' is not limited to the Western Energy Crisis.
In an article published November 6, 2007 ("Competitively Priced Electricity Costs More, Studies Show"), the New York Times revealed that retail electricity prices had risen much more in states that adopted competitive pricing than in those that had retained traditional rates set by the government.
The source of the data was the Energy Information Administration. A non-profit advocacy group, Power in the Public Interest, used the data to compare prices in 13 states and Washington, all of which have adopted market pricing for industrial users, with the rest of the nation.
The difference in prices charged to industrial companies in market states compared with those in regulated ones nearly tripled from 1999 to 2007.
According to the New York Times, "The data are the latest to show that competition, which was promoted by big industrial companies and Enron as the best way to create competitive incentives to reduce prices, has instead resulted in higher and faster rising prices. Some big industrial customers have turned against the changes they once championed, saying that if markets produced lower prices they would favor them but that electricity auctions have not worked... In market states, electricity customers of all kinds, from homeowners to electricity-hungry aluminum plants, pay $48 billion more each year for power than they would have paid in states with the traditional system of government boards setting electric rates."
HEALTHCARE SERVICES
We can similarly see distortions in healthcare, which is approached as an area of choice here in America.
Healthcare in America is paid for, in general, and at least partly, by for-profit health insurance companies that sell insurance directly to the public; and it is provided, in general, by for-profit healthcare corporates. So there are actually two for-profit services at play for the public - the insurance service and the medical service. Both these services are distorted.
The distortions on the insurance side include denial of insurance coverage, bumping 'customers' from insurance coverage, denial of claims, densely-worded contracts, and business activity focussed on denial of insurance, bumping 'customers' from insurance and denial of claims (inflating administrative costs thereby).
Imagine a business investing its energies in DENYING service to customers, rejecting customers and chopping customers! It is a travesty, yet this is what health insurance companies do. Why? Because there is no genuine customer, and there is no genuine business!
The distortions on the medical side include unnecessary 'care', and sky-high 'prices' of care.
Unnecessary medical care takes the form of unnecessary tests and procedures, unnecessary drug prescriptions, even unnecessary hospitalization. Tests, drug prescriptions and hospitalization do not add value for the customer, they are not a legitimate provision of services for gain of state. Yet when provided by a for-profit business, they are 'billed' willy-nilly, exactly as if more of them meant more gain of state to the consumer, like a car packed with goodies, extras and doodads - in short, as if more is better. Doctors focus on billing when that focus has no relation to the requirement they have to cater to, which is to prevent loss of state and restore lost state.
In his book Shock Therapy for the American Health Care System, Robert Arthur Levine, MD points out that there are two factors that make up 40% or more of the health care dollars spent:
1. unnecessary care
2. administrative costs of insurance companies.
As for sky-high 'prices' - benchmark the prices paid for lab tests and pharmaceuticals in the US against prices paid in other industrialized countries, where there is no direct for-profit mechanism applied to healthcare. Compare the differences with area-of-choice products and services like cars.
The price of the drug (or the test) does not represent any gain of state to the consumer; there may be a high cost to creating it, but this is not necessarily the case, and when it is not, the high price reflects one thing and one thing only - the lack of choice or the helplessness of the consumer over using the drug.
There is not a single known case of a country that has a largely free market, for-profit healthcare system organized on the lines of, say, the US auto industry, that delivers decent healthcare to the general population (to the common man, or the Average Joe / Jane) in the same way that decent autos are delivered.
FOOD AND CHOICE
If applying market principles to areas of no-choice distorts the supply and the prices, why - it can be asked - is the food market not distorted? Is food not the biggest area of no-choice?
We argue that the food market escapes the prediction of the no-choice model because the food market is actually a food item market, and every food item is, to a large extent, an area of choice rather than an area of no-choice.
Food is - for civilized man - at once something that prevents loss of state (proximately by staving off hunger, and ultimately by repleneshing body energy) and something that brings gain of state (by sensual pleasure in the combination of taste, texture and temperature). Food available in the market caters at least somewhat to the gain-of-state aspect - its selling proposition at least in part is the gain of state it gives you. Of course the gain is different for different food items and markets - it is lower for 'basic' food items such as vegetables or bread, which in themselves offer lower gain of state, and it is higher for 'exotic' food items such as restaurant foods, which offer higher gain of state.
The principle of dimishing gain-of-state applies to food items - the consumption of any food item reduces the gain of state on the subsequent consumption of the same item (but different food items have different gain of states). However, we have to eat 'food' - as distinct from any particular food item - everyday to prevent loss of state. The principle of diminishing gain-of-state does not apply to 'food' (that is, marginal utility is meaningless for 'food'). The net effect is that we eat a variety of food items, and the extent of the variety is given by what we can afford. The gain-of-state aspect of food translates into demand for a variety of food items, ACCORDING TO THE CURRENT LEVEL OF THE ECONOMY. On the other hand, people will eat the same food item everyday when they eat to stave off hunger.
Insofar as food items provide gain-of-state, they are a legitimate area of business. But where there are food shortages, say on account of droughts or floods, and people are starving or dying of starvation, any item of food is needed to prevent loss of state; there people need food items to stave off hunger and death, not to enjoy the sensual pleasure of eating. Therefore, although many people may need food in such situations, that is not 'demand', and is not a legitimate area of business.
People have no choice but to eat food, but even in basic (raw) food-products there is some real choice, a real variety of options: you can eat wheat or rice or cereals or meat or nuts or vegetables or lentils or eggs or fruits or dairy products or fish - each has its own distinct economic, geographic and cultural characteristics: know-how, supply levels, sources. Further, foods like vegetables, lentils, fruits, meat and fish come in many varieties of their own. To stave off hunger you can eat any of these foods and you can eat them in any mix. This 'choice' comes from nature - both the nature that is out there, the environment, and the nature that is in here, human nature. The environment provides a wide variety of possible foods which humans harness; and humans are adapted to taking a wide variety of food.
(Economists call this variety of consumption options as 'substitute goods'.)
You can eat less KINDS of food, and more KINDS of food.
Further, within broad limits, you can eat less, and you can eat more (although you may not eat as much as you need to or want to). Food consumption has high proportionality of quantity.
This vast, powerful choice in the hands of consumers prevents distortion in the food market.
The other important point is that in the case of food, the choice of substitute goods is with the consumer - the consumer has choice over what to buy, how much to buy, when to buy, how often to buy - or not to buy at all.
Healthcare is not at all like this. if you get malaria you do not have a meaningful, economically distinct choice of 'a' or 'b' or 'c' or 'd' or 'e' to cater to it; nor can you make-do with some 'mix' of them. Even if there are substitute goods (alternative drugs or therapies), the consumer has no choice over what to buy, how much to buy, when to buy, how often to buy. He or she always has to buy what somebody else tells him to buy, and ONLY what somebody else tells him to buy.
(Food is a good illustration of 'gray area', which was described in the earlier post 'Business, Government and Services'. With food, the area of no-choice and the area of choice are not absolutely distinct; it is difficult to tell apart the two services except at the extremes. Whereas 'food', in the abstract, is an area of no-choice, any actual item of food is largely an area of choice. So if the food business escapes the prediction of the no-choice model, it is because, very likely, the food business actually services an area of choice and not an area of no-choice, or it services what becomes an area of no-choice only in an extreme sense and in extreme cases of shortage.)
GENERAL INSURANCE
The other area that escapes the prediction of the no-choice model is general insurance - that is, insurance for cars, homes, factories, farms, art collections and so on.
General insurance is a service for restoring loss of state, and therefore falls in an area of no-choice. But the market is not greatly distorted.
There are reasons for this. As we discussed in 'SERVICES, PROPORTION AND PRICE', there is magnitude of choice and no-choice. If your car requires a denting-painting job, there is loss of state, but not of high magnitude; correspondingly the force of no-choice is not very strong. It is possible to get by without restoring state for a few days or weeks. This helps to keep auto insurance (by and large) from becoming the horror story that healthcare is.
But there are other, perhaps more powerful, factors. For one, general insurance is almost entirely concerned with states that can be and are priced; thereby the price of restoring lost state can be derived from, and is limited to, the price of gaining state. For another, general insurance such as auto insurance is usually mandatory by law, which makes for a large, 'assured' customer base. These factors have a beneficial effect on both price and service.
Mandating that everyone buy insurance sounds innocuous, but as a principle it is a massive distortion of the market principle that the consumer has a choice between buying and not buying. However, it acts as a counter-distortion to the original distortion, and can be effective in making for a functioning market and service, as with auto insurance, or indeed, health insurance as in the Swiss system.
UP NEXT: Summation
IDEAS FOR THE HEALTHCARE DEBATE
I argue that there is something about healthcare services that makes them fundamentally unsuited to be provided directly to the public by for-profit business.
That, in general, there is a kind of services that are unsuited for for-profit business to provide directly to the public, and a kind of services that are indeed suited for for-profit business to provide.
And that, in general, we can say the same thing of government: there is a kind of services that are unsuited for government to provide, and a kind of services that are rather suited for government to provide.
I propose a rather simple principle for deciding either way. It lies in the question: do you have a choice about the service? Can you choose what to buy, when to buy, how much to buy, how often to buy?
If yes, for-profit business does a better job of providing it (and government does NOT). If no, it is government that rather does the better job (and not for-profit business).
I develop this argument in a series of blog posts here on Wide Avenue. For convenient navigation, I provide a series of links to the posts. Please follow the links in sequential order:
BUSINESS, GOVERNMENT AND SERVICES
SERVICES, PROPORTION AND PRICE
MARKET AND AREAS OF NO-CHOICE
That, in general, there is a kind of services that are unsuited for for-profit business to provide directly to the public, and a kind of services that are indeed suited for for-profit business to provide.
And that, in general, we can say the same thing of government: there is a kind of services that are unsuited for government to provide, and a kind of services that are rather suited for government to provide.
I propose a rather simple principle for deciding either way. It lies in the question: do you have a choice about the service? Can you choose what to buy, when to buy, how much to buy, how often to buy?
If yes, for-profit business does a better job of providing it (and government does NOT). If no, it is government that rather does the better job (and not for-profit business).
I develop this argument in a series of blog posts here on Wide Avenue. For convenient navigation, I provide a series of links to the posts. Please follow the links in sequential order:
BUSINESS, GOVERNMENT AND SERVICES
SERVICES, PROPORTION AND PRICE
MARKET AND AREAS OF NO-CHOICE
MARKET AND AREAS OF NO-CHOICE
Examining the applicability of 'market' to services in areas of no-choice.
By Desaraju Subrahmanyam.
See the post 'Business, Government and Services' for an introduction to the terms 'state', 'area of choice', 'area of no-choice'.
ABSTRACT
We argue that for products and services in areas that are inherently areas of no-choice, the concept of the market does not apply. In particular, the notion of 'price' does not apply. Thereby we move towards understanding WHY areas of no-choice are best left to government, and areas of choice are best left to business.
COMMUNISM, BUSINESS AND CUSTOMERS -
Imagine holding a gun to a businessman's head, and telling him to provide a service. Imagine telling him what to provide, when to provide, how much to provide and how much to charge - or else. Would he be able to properly provide the service?
Of course not, and we know what kind of economic system that is: communism. A command economy is essentially no different from putting a gun to the head of a businessman. The condition that the businessman has choice in making investment decisions and other business decisions
such as pricing is vital to the proper production of the service. When choice is removed from the businessman, it distorts the production of the service and makes it a travesty.
The condition of businessmen having choice defines the free market, and the free market is the most efficient system known to provide a stream of products and services to consumers.
Now imagine the gun on the opposite side. Imagine a consumer having a gun put to his head and being told to buy something. Imagine him being told what to buy, when to buy, how much to buy and how much to pay - or else. What would be the repercussions of that?
In the ideological war of the twentieth century between capitalism and communism, the principles of free enterprise and customer choice were vigorously championed in academic and public debate, and became part of the social consciousness in advanced countries. Communism was an assault on businessmen and their freedom, and on customers and their choice. (There is a story about a communist who tells a crowd, "After the revolution, we shall all have strawberries and cream." A man in the crowd says, "But I don't like strawberries and cream." The communist replies, "After the revolution, you will have strawberries and cream, AND like it.")
But customer choice has a flip side - namely, customer no-choice: there are products and services that people have no choice but to obtain.
In such areas of no-choice, the 'customer' is exactly in the position of having a gun put to his head. Of course, the gun is not there because of ideology, it is there owing to a complex of factors including sheer chance, and though human volition and action can be one of the factors (particularly with victims of crime), that human action is not intended to force the victim to seek a service. YET THE EFFECT IS THE SAME: no choice. For such products and services, the concept of 'market' does not apply. The condition that customers have choice in making purchase decisions and other economic decisions is vital to having a market system. When choice is not available to the customer, it undermines the market and all but makes it vanish.
But this appears not to have been clearly recognized - or at any rate has not been forcefully articulated - in public debate. In all discourse, the notion of 'market', with its underlying principles of choice, price and competition are applied willy-nilly to all products and services, without regard to distinctions of choice and no-choice between them.
CONSUMERS AND CUSTOMERS
At this point, we make an important distinction between 'consumers' and 'customers'.
A consumer is a person who USES a product or a service. A customer is a person who CHOOSES a product or service.
Products and services have consumers, and businesses have customers. (By 'business' we mean a for-profit commercial enterprise.)
Not all products and services in society are consumed by choice or provided by businesses, therefore not all consumers are customers.
A customer, however, is always a consumer.
Thereby we DEFINE customers on the basis of the choice they can make, and this definition formalizes the fact that choice is as vital to customers as it is to businessmen; without it, there is no more a customer than there is a businessman.
CUSTOMER CHOICE
The question can be asked: what is the meaning of 'customer choice' when the customer has limited means at his or her disposal to purchase?
How can we say that a customer is 'choosing' something when his or her purchases are dictated by the means at his or her disposal? When a person buys a small car but really wants a big car and cannot afford it, is that 'customer choice'?
The answer is that though the members of an economy are of limited means, every member plans for and chooses what to buy, and when to buy it, from among many different options. The ideal member would purchase everything that gives him or her gain of state, all the time. Real members, however, have to trade-off what to buy and what to forego, how much to buy and how much to forego, when to buy and when to forego, how often to buy and how often to forego. The economy offers the member a range of products and services from which he or she decides on a few, and plans on buying (the higher the level of the economy, the greater the range). It certainly is not 'customer choice' when a person buys a small car while he or she really wants a big car and cannot afford it. But every person chooses from among the many possible ways in which he or she can spend his or her limited means. 'Customer choice' is WHAT THE CUSTOMER CHOOSES TO DO WITH HIS OR HER LIMITED MEANS (including just saving his or her means instead of buying anything.)
That is 'customer choice' in the broadest sense. There are narrower and narrower senses. When a member buys a car, he or she chooses having private transport over using public transport and saving the money (possibly to buy something else). Narrower yet, he or she chooses a car over a bicycle or a moped. And narrower yet, he or she chooses a certain make and model of car over other makes and models. All these are 'customer choices'.
Correspondingly, businesses compete to sell to members with limited means; they compete over which product or service the consumer will choose to spend his limited means on. In the broadest sense, every business is in competition with every other business to attract customer choice. It is only in the narrowest sense that a carmaker competes with another car maker for customers.
PRICES
We now make the argument why, for products and services in areas of no-choice, the concept of 'market' does not apply.
The market system is premised on the existence of certain conditions described in economic theory, using the concepts of marginal utility, diminishing returns, supply and demand, price and allocation of resources based on prices. These conditions obtain only when customers have CHOICE in making purchase decisions: what to buy, when to buy, how much to buy and how often to buy - or not buy at all! When customers do not have choice in making purchase decisions, the conditions for a market do not obtain.
Let us focus on the cornerstone of the market - prices. The market consists of businessmen and customers, and prices have meaning for both of them.
To the customer, prices indicate how much gain of state is possible for him or her, at any given time and place.
To use the terms defined in this blog, price is a measure of gain of state; in general, a higher price indicates that a higher gain of state (value addition) is attained by the consumer. If a product offers higher gain of state, consumers choose to pay higher prices to buy it. If a product is priced higher than the gain of state it provides, the consumer will generally not buy it, and he or she is able to not buy it because he or she has a choice in the matter. Therefore, in general, products and services are not priced higher than the gain of state they provide. For their part, businessmen charge higher prices to provide higher gain of state; in general, they do not charge prices lower than the gain of state provided, and they can do this because they have choice in the matter. Therefore, in general, products and services are not priced lower than the gain of state they provide, and it is possible to attain an equilibrium price.
But paying a price is loss of state, because it is loss of opportunity to gain any other state; to quote from an economics primer, "Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption is equal to the opportunity cost determined by the price, that is, the marginal utility of alternative consumption choices." In this blog, we talk in terms of gain of state rather than marginal utility; therefore "Consumers will be willing to buy a given quantity of a product, at a given price, if the gain of state of consuming it is at least equal to the opportunity cost determined by the price, that is, the gain of state of alternative consumption choices."
So a consumer comes to buy when the difference of gain of state brought by the product and loss of state brought by the opportunity cost is positive - the greater the difference, the more likely the consumer is to come to buy (or, more consumers are likely to come to buy).
Therefore when gain of state is high, demand is high; and when price is low, demand is high. When gain of state is low, demand is low; and when price is high, demand is low. (Thus we can assert that if a service is priced higher than the gain of state it provides, the consumer will generally not buy it; the consumer 'knows' what price a service is 'worth' because he or she calculates the opportunity cost based on the prices of the other things he or she can buy with the money. These other things need not even be in the same sector of state; the consumer can weigh whether to buy a new dress or a new cell phone with the money he or she has. Thus all sectors of the economy are bound together in their prices, although the binding is neither rigid nor uniform.)
Further, when gain of state is high and price is high, the differential of gain of state and opportunity cost is low, thereby demand is low.
On the business side, the business incurs costs in making products available on the market. A businessman comes to sell when the difference of the sale price and the production cost is positive - the greater the difference, the more likely is the businessman to come to sell (or,
the more businessmen are likely to come to sell).
Therefore when price is high, supply is high; and when production cost is low, supply is high. When price is low, supply is low; and when production cost is high, supply is low. (Businessmen are attracted to areas of high demand by the high prices, and thereby a supply is soon established to meet the demand. From the social point of view, prices 'tell' businessmen what service is required, at any given time and place.)
Further, when price is high and production cost is high, the differential of price and production cost is low, thereby supply is low.
We have to note that both businessmen and customers are at bottom playing for maximizing gain of state. As money held represents opportunity to gain state, businessmen look to maximize money profit while producing and selling products and services; customers look to minimize money outgo while buying and consuming products and services.
Thus price is meaningful in areas of choice, and markets can exist. Indeed, prices make markets possible.
PRICES CONTINUED
But what is the meaning of price when the 'customer' has no choice in buying or not buying a product or service (or how much and how frequently to buy)?
The answer is: no meaning.
Why? Simply because, when you have no choice, you will pay any price! (In graduated terms, the less the choice you have, the higher the price you will pay.)
The meaninglessness of price in situations of duress hardly needs explication, but here is a simple scenario nevertheless. Imagine that a hurricane devastates an area. Applying conventional theory, the 'demand' for emergency services goes up, and hence the 'price' goes up.
For-profit businessmen who provide emergency services can charge high prices of rescue to people stranded in storm water, and get many orders. If that happens there will be many who cannot afford the high price of rescue, and will remain stranded. The point here is not that some will be left stranded; this is economics, and they are simply outside the demand-band (if you do not have the money to back up your requirement for products and services, your requirement does not constitute demand). The point is that the businessman can offer to rescue people for whatever price they can pay (as long as it is above his costs). It makes more business sense to do this than to ignore those who cannot meet the high price in full. And he can do this because there is no real value addition to the service; it brings no gain of state to which to effectively tag a price. This can be played at the other end as well - just as he pushes down prices for those who have less money, the
businessman can push up prices for those who have more money.
This kind of arbitrary pricing does not work when the consumer has a choice. A rational consumer is alert to the opportunity cost given by the prices of other consumption choices, and will not pay any price higher than what the service is worth. Further, a rational consumer will generally not pay an opportunistic higher price for a product or service that others get at a lower price. If the businessman insists on a higher price, the consumer will simply not purchase, and he or she can very well not purchase because he or she has a choice in the matter. This is one of the reasons why businessmen do not give away products and services for any price that is above their costs, although this would appear to guarantee profits AND attract more customers. Different customers will not and do not pay different prices for the same product or service. That is not 'price', and it brings us back to the fact that prices have meaning - they cannot be anything, anywhere, anytime. (This is not to suggest that prices are always absolutely uniform all the time and for everybody. To the contrary, price is continuously varied by businesses for many reasons. There are price cuts, special offers, holiday discounts; loyal customers, club members and war veterans get lower prices. But such variations are made according to some principle, and are far from arbitrary, "show-me-the-customer-and-I-will-show-the-price" pricing.)
In a situation of disaster or duress, such as hurricane devastation, a person will pay a higher 'price' for rescue even when others are paying lower 'prices' because he or she has no choice. Besides, the person cannot estimate the 'worth' of the service from the opportunity cost, because in a life-and-death situation there ARE no other consumption choices the consumer can consider spending his money on.
(Economists call this 'perfectly price-inelastic demand', and the demand curve is a straight line parallel to the price axis. What it depicts, at bottom, is a condition in which price has become irrelevant. In such a condition markets cannot exist.)
Therefore price is meaningless when the consumer has no choice. As price is meaningless in areas of no-choice, there cannot exist a market for products and services in areas of no-choice. And competition in areas of no-choice will not drive down 'prices'. Businessmen will cartelize rather than compete. (On the other hand, the surest way of breaking cartels and bringing in competition is genuine consumer
choice.)
In short, markets exist only when both the businessman and the customer are free to produce and purchase. (Or, at a simpler level, markets exist only when both the businessman and the customer are free to enter and leave.)
And this holds in almost all areas of no-choice: national defense, police, judicial system, public health, environment, money system - and individual healthcare!
MARGINAL UTILITY, LAW OF DEMAND AND OPPORTUNITY COST
Price condenses and captures all the phenomena of the market, such as marginal utility, law of demand and opportunity cost. A discussion of price is necessarily a discussion of all these market phenomena. If price is irrelevant when consumers have no choice, it means marginal
utility, law of demand and opportunity cost are irrelevant (or do not hold) when consumers have no choice. However, understanding marginal utility, law of demand and opportunity cost on their own terms reveals explicitly their inapplicability to areas of no-choice.
In economics, 'marginal utility' is the fundamental concept. This is the term for the desirability (or 'satisfaction' or 'benefit') of consuming an additional quantity of a product or service, say one more candy bar or one more vacation cruise. The greater the desirability of consuming one more of it (or consuming it once more), the higher is the marginal utility of a product or service. Some products and services have high marginal utility, and some products and services have low marginal utility.
In general, the marginal utility of products and services diminishes: with every additional consumption, the desirability of consuming yet some more of the same product or service decreases. This is the law of diminishing marginal utility. The graphical plot of the marginal
utility of a product or service against quantity consumed is a curve sloping downward as quantity consumed increases. Just as different products and services have different marginal utilities, they have different marginal utility curves: the curves have different starting points and different slopes dictated by the peculiarities of the product or service.
For products and services that prevent loss of state or restore lost state, however, the concept of marginal utility does not apply. When we consider services such as courts of law, police, national defense, firefighting and healthcare, we find that it is meaningless to identify the marginal utility. Such services are not 'desirable' in the same sense that a candy bar or a vacation cruise is - we do not get
the same kind of 'satisfaction' or 'benefit' by consuming them, though we 'need' them in their own way. Indeed, our greatest 'satisfaction' or 'benefit' lies in not having to use these services at all. Therefore it makes no sense to consider the 'desirability' of consuming an additional quantity of such services.
And the law of diminishing marginal utility all the more does not apply. Consider whether a person's 'need' for firefighting services, for example, diminishes after a round of consumption. In general, our 'need' for services in areas of no-choice is constant.
The law of demand is an important principle of economics which states that, for a given product or service, the higher the price, the less it is demanded. The amount of a service that buyers purchase at a higher price is less because as the price of the service goes up, so does
the opportunity cost of buying it. People avoid buying a service that forces them to forgo the consumption of other things. (The law of demand holds for a product or service only when all other factors remain unchanged - for example, the prices of other products and services must remain unchanged.)
The opposing relationship of price and quantity demanded means equally that the lower the price, the more the service is demanded.
Clearly, the law of demand does not apply in areas of no-choice. It is obvious that the demand for healthcare, for example, will not go down if prices go up. As healthcare is a requirement that crushes all others in its path, people will divert money to it by cutting down on all other purchases, and this makes the demand curve look less like the familiar negative-sloping curve and more like the special case straight line parallel to the price axis. Of course, this is possible only within certain limits, as for every rise in price there will be people who no longer have the money to afford it, and that means a decrease in demand by the very definition of 'demand'. However, the limits are broad enough to be significant.
But it is really in the other version of the law of demand that its inapplicability to areas of no-choice is strikingly apparent. According to the law of demand, the lower the price, the more the service is demanded. But the demand for healthcare will not go up if prices go down. People will not cut down on other purchases and prefer to visit doctors and take medicines just because the prices are lower (which
brings us back to the central fact that there is no 'utility' in such services as found in candy bars and vacation cruises).
We can also see, in the above, that the notion of opportunity cost is irrelevant for products and services that prevent loss of state or restore lost state. Where healthcare is concerned, we would not consider having less of it to buy more of something else, or postpone it to
buy something else now; we would go to the doctor as many times as it takes, get as many medicines as it takes, and undergo as many tests and procedures as it takes. Neither would we consider having more of it by buying less of something else: we would go to the doctor ONLY as many times as it takes, get ONLY as many medicines as it takes, and undergo ONLY as many tests and procedures as it takes.
The all-important condition for a market to exist is equilibrium between the businessman and the customer. The businessman always wants to sell at the highest price and produce at the lowest cost; the customer always wants to get the highest gain of state and buy at the lowest price. For any given product, there can be a price at which the impulses of the two are in equilibrium - AS LONG AS BOTH THE BUSINESSMAN AND THE CUSTOMER HAVE CHOICE OVER PRICING AND PURCHASE DECISIONS. When the customer has no choice in buying (or when the businessman has no choice in pricing), there is no price at which the impulses of the two come to equilibrium.
When consumers have no choice over purchase decisions, economists draw a vertical line for the demand graph and call it perfectly price-inelastic demand. When businessmen have no choice over price decisions, economists draw a horizontal line for the supply graph and call it perfectly price-elastic demand. This does not mean that they represent conventional market phenomena just as well as normal demand that exhibits the demand curve. They do not have the same legitimacy - they represent the boundary conditions where normal market phenomena have just about vanished.
UP NEXT: Distortions
By Desaraju Subrahmanyam.
See the post 'Business, Government and Services' for an introduction to the terms 'state', 'area of choice', 'area of no-choice'.
ABSTRACT
We argue that for products and services in areas that are inherently areas of no-choice, the concept of the market does not apply. In particular, the notion of 'price' does not apply. Thereby we move towards understanding WHY areas of no-choice are best left to government, and areas of choice are best left to business.
COMMUNISM, BUSINESS AND CUSTOMERS -
Imagine holding a gun to a businessman's head, and telling him to provide a service. Imagine telling him what to provide, when to provide, how much to provide and how much to charge - or else. Would he be able to properly provide the service?
Of course not, and we know what kind of economic system that is: communism. A command economy is essentially no different from putting a gun to the head of a businessman. The condition that the businessman has choice in making investment decisions and other business decisions
such as pricing is vital to the proper production of the service. When choice is removed from the businessman, it distorts the production of the service and makes it a travesty.
The condition of businessmen having choice defines the free market, and the free market is the most efficient system known to provide a stream of products and services to consumers.
Now imagine the gun on the opposite side. Imagine a consumer having a gun put to his head and being told to buy something. Imagine him being told what to buy, when to buy, how much to buy and how much to pay - or else. What would be the repercussions of that?
In the ideological war of the twentieth century between capitalism and communism, the principles of free enterprise and customer choice were vigorously championed in academic and public debate, and became part of the social consciousness in advanced countries. Communism was an assault on businessmen and their freedom, and on customers and their choice. (There is a story about a communist who tells a crowd, "After the revolution, we shall all have strawberries and cream." A man in the crowd says, "But I don't like strawberries and cream." The communist replies, "After the revolution, you will have strawberries and cream, AND like it.")
But customer choice has a flip side - namely, customer no-choice: there are products and services that people have no choice but to obtain.
In such areas of no-choice, the 'customer' is exactly in the position of having a gun put to his head. Of course, the gun is not there because of ideology, it is there owing to a complex of factors including sheer chance, and though human volition and action can be one of the factors (particularly with victims of crime), that human action is not intended to force the victim to seek a service. YET THE EFFECT IS THE SAME: no choice. For such products and services, the concept of 'market' does not apply. The condition that customers have choice in making purchase decisions and other economic decisions is vital to having a market system. When choice is not available to the customer, it undermines the market and all but makes it vanish.
But this appears not to have been clearly recognized - or at any rate has not been forcefully articulated - in public debate. In all discourse, the notion of 'market', with its underlying principles of choice, price and competition are applied willy-nilly to all products and services, without regard to distinctions of choice and no-choice between them.
CONSUMERS AND CUSTOMERS
At this point, we make an important distinction between 'consumers' and 'customers'.
A consumer is a person who USES a product or a service. A customer is a person who CHOOSES a product or service.
Products and services have consumers, and businesses have customers. (By 'business' we mean a for-profit commercial enterprise.)
Not all products and services in society are consumed by choice or provided by businesses, therefore not all consumers are customers.
A customer, however, is always a consumer.
Thereby we DEFINE customers on the basis of the choice they can make, and this definition formalizes the fact that choice is as vital to customers as it is to businessmen; without it, there is no more a customer than there is a businessman.
CUSTOMER CHOICE
The question can be asked: what is the meaning of 'customer choice' when the customer has limited means at his or her disposal to purchase?
How can we say that a customer is 'choosing' something when his or her purchases are dictated by the means at his or her disposal? When a person buys a small car but really wants a big car and cannot afford it, is that 'customer choice'?
The answer is that though the members of an economy are of limited means, every member plans for and chooses what to buy, and when to buy it, from among many different options. The ideal member would purchase everything that gives him or her gain of state, all the time. Real members, however, have to trade-off what to buy and what to forego, how much to buy and how much to forego, when to buy and when to forego, how often to buy and how often to forego. The economy offers the member a range of products and services from which he or she decides on a few, and plans on buying (the higher the level of the economy, the greater the range). It certainly is not 'customer choice' when a person buys a small car while he or she really wants a big car and cannot afford it. But every person chooses from among the many possible ways in which he or she can spend his or her limited means. 'Customer choice' is WHAT THE CUSTOMER CHOOSES TO DO WITH HIS OR HER LIMITED MEANS (including just saving his or her means instead of buying anything.)
That is 'customer choice' in the broadest sense. There are narrower and narrower senses. When a member buys a car, he or she chooses having private transport over using public transport and saving the money (possibly to buy something else). Narrower yet, he or she chooses a car over a bicycle or a moped. And narrower yet, he or she chooses a certain make and model of car over other makes and models. All these are 'customer choices'.
Correspondingly, businesses compete to sell to members with limited means; they compete over which product or service the consumer will choose to spend his limited means on. In the broadest sense, every business is in competition with every other business to attract customer choice. It is only in the narrowest sense that a carmaker competes with another car maker for customers.
PRICES
We now make the argument why, for products and services in areas of no-choice, the concept of 'market' does not apply.
The market system is premised on the existence of certain conditions described in economic theory, using the concepts of marginal utility, diminishing returns, supply and demand, price and allocation of resources based on prices. These conditions obtain only when customers have CHOICE in making purchase decisions: what to buy, when to buy, how much to buy and how often to buy - or not buy at all! When customers do not have choice in making purchase decisions, the conditions for a market do not obtain.
Let us focus on the cornerstone of the market - prices. The market consists of businessmen and customers, and prices have meaning for both of them.
To the customer, prices indicate how much gain of state is possible for him or her, at any given time and place.
To use the terms defined in this blog, price is a measure of gain of state; in general, a higher price indicates that a higher gain of state (value addition) is attained by the consumer. If a product offers higher gain of state, consumers choose to pay higher prices to buy it. If a product is priced higher than the gain of state it provides, the consumer will generally not buy it, and he or she is able to not buy it because he or she has a choice in the matter. Therefore, in general, products and services are not priced higher than the gain of state they provide. For their part, businessmen charge higher prices to provide higher gain of state; in general, they do not charge prices lower than the gain of state provided, and they can do this because they have choice in the matter. Therefore, in general, products and services are not priced lower than the gain of state they provide, and it is possible to attain an equilibrium price.
But paying a price is loss of state, because it is loss of opportunity to gain any other state; to quote from an economics primer, "Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption is equal to the opportunity cost determined by the price, that is, the marginal utility of alternative consumption choices." In this blog, we talk in terms of gain of state rather than marginal utility; therefore "Consumers will be willing to buy a given quantity of a product, at a given price, if the gain of state of consuming it is at least equal to the opportunity cost determined by the price, that is, the gain of state of alternative consumption choices."
So a consumer comes to buy when the difference of gain of state brought by the product and loss of state brought by the opportunity cost is positive - the greater the difference, the more likely the consumer is to come to buy (or, more consumers are likely to come to buy).
Therefore when gain of state is high, demand is high; and when price is low, demand is high. When gain of state is low, demand is low; and when price is high, demand is low. (Thus we can assert that if a service is priced higher than the gain of state it provides, the consumer will generally not buy it; the consumer 'knows' what price a service is 'worth' because he or she calculates the opportunity cost based on the prices of the other things he or she can buy with the money. These other things need not even be in the same sector of state; the consumer can weigh whether to buy a new dress or a new cell phone with the money he or she has. Thus all sectors of the economy are bound together in their prices, although the binding is neither rigid nor uniform.)
Further, when gain of state is high and price is high, the differential of gain of state and opportunity cost is low, thereby demand is low.
On the business side, the business incurs costs in making products available on the market. A businessman comes to sell when the difference of the sale price and the production cost is positive - the greater the difference, the more likely is the businessman to come to sell (or,
the more businessmen are likely to come to sell).
Therefore when price is high, supply is high; and when production cost is low, supply is high. When price is low, supply is low; and when production cost is high, supply is low. (Businessmen are attracted to areas of high demand by the high prices, and thereby a supply is soon established to meet the demand. From the social point of view, prices 'tell' businessmen what service is required, at any given time and place.)
Further, when price is high and production cost is high, the differential of price and production cost is low, thereby supply is low.
We have to note that both businessmen and customers are at bottom playing for maximizing gain of state. As money held represents opportunity to gain state, businessmen look to maximize money profit while producing and selling products and services; customers look to minimize money outgo while buying and consuming products and services.
Thus price is meaningful in areas of choice, and markets can exist. Indeed, prices make markets possible.
PRICES CONTINUED
But what is the meaning of price when the 'customer' has no choice in buying or not buying a product or service (or how much and how frequently to buy)?
The answer is: no meaning.
Why? Simply because, when you have no choice, you will pay any price! (In graduated terms, the less the choice you have, the higher the price you will pay.)
The meaninglessness of price in situations of duress hardly needs explication, but here is a simple scenario nevertheless. Imagine that a hurricane devastates an area. Applying conventional theory, the 'demand' for emergency services goes up, and hence the 'price' goes up.
For-profit businessmen who provide emergency services can charge high prices of rescue to people stranded in storm water, and get many orders. If that happens there will be many who cannot afford the high price of rescue, and will remain stranded. The point here is not that some will be left stranded; this is economics, and they are simply outside the demand-band (if you do not have the money to back up your requirement for products and services, your requirement does not constitute demand). The point is that the businessman can offer to rescue people for whatever price they can pay (as long as it is above his costs). It makes more business sense to do this than to ignore those who cannot meet the high price in full. And he can do this because there is no real value addition to the service; it brings no gain of state to which to effectively tag a price. This can be played at the other end as well - just as he pushes down prices for those who have less money, the
businessman can push up prices for those who have more money.
This kind of arbitrary pricing does not work when the consumer has a choice. A rational consumer is alert to the opportunity cost given by the prices of other consumption choices, and will not pay any price higher than what the service is worth. Further, a rational consumer will generally not pay an opportunistic higher price for a product or service that others get at a lower price. If the businessman insists on a higher price, the consumer will simply not purchase, and he or she can very well not purchase because he or she has a choice in the matter. This is one of the reasons why businessmen do not give away products and services for any price that is above their costs, although this would appear to guarantee profits AND attract more customers. Different customers will not and do not pay different prices for the same product or service. That is not 'price', and it brings us back to the fact that prices have meaning - they cannot be anything, anywhere, anytime. (This is not to suggest that prices are always absolutely uniform all the time and for everybody. To the contrary, price is continuously varied by businesses for many reasons. There are price cuts, special offers, holiday discounts; loyal customers, club members and war veterans get lower prices. But such variations are made according to some principle, and are far from arbitrary, "show-me-the-customer-and-I-will-show-the-price" pricing.)
In a situation of disaster or duress, such as hurricane devastation, a person will pay a higher 'price' for rescue even when others are paying lower 'prices' because he or she has no choice. Besides, the person cannot estimate the 'worth' of the service from the opportunity cost, because in a life-and-death situation there ARE no other consumption choices the consumer can consider spending his money on.
(Economists call this 'perfectly price-inelastic demand', and the demand curve is a straight line parallel to the price axis. What it depicts, at bottom, is a condition in which price has become irrelevant. In such a condition markets cannot exist.)
Therefore price is meaningless when the consumer has no choice. As price is meaningless in areas of no-choice, there cannot exist a market for products and services in areas of no-choice. And competition in areas of no-choice will not drive down 'prices'. Businessmen will cartelize rather than compete. (On the other hand, the surest way of breaking cartels and bringing in competition is genuine consumer
choice.)
In short, markets exist only when both the businessman and the customer are free to produce and purchase. (Or, at a simpler level, markets exist only when both the businessman and the customer are free to enter and leave.)
And this holds in almost all areas of no-choice: national defense, police, judicial system, public health, environment, money system - and individual healthcare!
MARGINAL UTILITY, LAW OF DEMAND AND OPPORTUNITY COST
Price condenses and captures all the phenomena of the market, such as marginal utility, law of demand and opportunity cost. A discussion of price is necessarily a discussion of all these market phenomena. If price is irrelevant when consumers have no choice, it means marginal
utility, law of demand and opportunity cost are irrelevant (or do not hold) when consumers have no choice. However, understanding marginal utility, law of demand and opportunity cost on their own terms reveals explicitly their inapplicability to areas of no-choice.
In economics, 'marginal utility' is the fundamental concept. This is the term for the desirability (or 'satisfaction' or 'benefit') of consuming an additional quantity of a product or service, say one more candy bar or one more vacation cruise. The greater the desirability of consuming one more of it (or consuming it once more), the higher is the marginal utility of a product or service. Some products and services have high marginal utility, and some products and services have low marginal utility.
In general, the marginal utility of products and services diminishes: with every additional consumption, the desirability of consuming yet some more of the same product or service decreases. This is the law of diminishing marginal utility. The graphical plot of the marginal
utility of a product or service against quantity consumed is a curve sloping downward as quantity consumed increases. Just as different products and services have different marginal utilities, they have different marginal utility curves: the curves have different starting points and different slopes dictated by the peculiarities of the product or service.
For products and services that prevent loss of state or restore lost state, however, the concept of marginal utility does not apply. When we consider services such as courts of law, police, national defense, firefighting and healthcare, we find that it is meaningless to identify the marginal utility. Such services are not 'desirable' in the same sense that a candy bar or a vacation cruise is - we do not get
the same kind of 'satisfaction' or 'benefit' by consuming them, though we 'need' them in their own way. Indeed, our greatest 'satisfaction' or 'benefit' lies in not having to use these services at all. Therefore it makes no sense to consider the 'desirability' of consuming an additional quantity of such services.
And the law of diminishing marginal utility all the more does not apply. Consider whether a person's 'need' for firefighting services, for example, diminishes after a round of consumption. In general, our 'need' for services in areas of no-choice is constant.
The law of demand is an important principle of economics which states that, for a given product or service, the higher the price, the less it is demanded. The amount of a service that buyers purchase at a higher price is less because as the price of the service goes up, so does
the opportunity cost of buying it. People avoid buying a service that forces them to forgo the consumption of other things. (The law of demand holds for a product or service only when all other factors remain unchanged - for example, the prices of other products and services must remain unchanged.)
The opposing relationship of price and quantity demanded means equally that the lower the price, the more the service is demanded.
Clearly, the law of demand does not apply in areas of no-choice. It is obvious that the demand for healthcare, for example, will not go down if prices go up. As healthcare is a requirement that crushes all others in its path, people will divert money to it by cutting down on all other purchases, and this makes the demand curve look less like the familiar negative-sloping curve and more like the special case straight line parallel to the price axis. Of course, this is possible only within certain limits, as for every rise in price there will be people who no longer have the money to afford it, and that means a decrease in demand by the very definition of 'demand'. However, the limits are broad enough to be significant.
But it is really in the other version of the law of demand that its inapplicability to areas of no-choice is strikingly apparent. According to the law of demand, the lower the price, the more the service is demanded. But the demand for healthcare will not go up if prices go down. People will not cut down on other purchases and prefer to visit doctors and take medicines just because the prices are lower (which
brings us back to the central fact that there is no 'utility' in such services as found in candy bars and vacation cruises).
We can also see, in the above, that the notion of opportunity cost is irrelevant for products and services that prevent loss of state or restore lost state. Where healthcare is concerned, we would not consider having less of it to buy more of something else, or postpone it to
buy something else now; we would go to the doctor as many times as it takes, get as many medicines as it takes, and undergo as many tests and procedures as it takes. Neither would we consider having more of it by buying less of something else: we would go to the doctor ONLY as many times as it takes, get ONLY as many medicines as it takes, and undergo ONLY as many tests and procedures as it takes.
The all-important condition for a market to exist is equilibrium between the businessman and the customer. The businessman always wants to sell at the highest price and produce at the lowest cost; the customer always wants to get the highest gain of state and buy at the lowest price. For any given product, there can be a price at which the impulses of the two are in equilibrium - AS LONG AS BOTH THE BUSINESSMAN AND THE CUSTOMER HAVE CHOICE OVER PRICING AND PURCHASE DECISIONS. When the customer has no choice in buying (or when the businessman has no choice in pricing), there is no price at which the impulses of the two come to equilibrium.
When consumers have no choice over purchase decisions, economists draw a vertical line for the demand graph and call it perfectly price-inelastic demand. When businessmen have no choice over price decisions, economists draw a horizontal line for the supply graph and call it perfectly price-elastic demand. This does not mean that they represent conventional market phenomena just as well as normal demand that exhibits the demand curve. They do not have the same legitimacy - they represent the boundary conditions where normal market phenomena have just about vanished.
UP NEXT: Distortions
SERVICES, PROPORTION AND PRICE
Distinguishing between services that have (and do not have) proportion and price.
By Desaraju Subrahmanyam.
ABSTRACT
We continue to make fundamental distinctions in services. First the point is highlighted that there is magnitude of choice and no-choice corresponding to magnitude of gain and loss of state. The concept of 'proportion' in service is introduced, and is used to distinguish between 'proportionate' and 'non-proportionate' services . Services which have price are distinguished from services that do not have price. Proper areas for business and government to provide services are proposed on the basis of these distinctions.
MAGNITUDE OF CHOICE AND NO-CHOICE
In 'Business, Government and Services', we proposed that business should provide services in areas of choice, and government should provide services in areas of no-choice.
The dichotomy of 'choice' and 'no-choice', however, is not always sharp. In many cases there is graduation in choice and no-choice.
This follows from two principles:
a) 'gain of state' has a characteristic relation with 'choice', and 'loss of state' has its own characteristic relation with 'choice': broadly, gain of state makes for an area of choice, and loss of state makes for an area of no-choice.
b) state has magnitude; the magnitude of state is proportional to the magnitude of the desirability of, or desire for, the condition that it refers to; accordingly, there are higher states and lower states.
Putting them together, graduation in state means that there is graduation in choice over it as well. Thus, the principle that gain of state makes for an area of choice becomes the principle that the BIGGER THE GAIN of state, the MORE it is an area of choice. The bigger and bigger the gain of state, the more and more choice one has over seeking the product or service.
Similarly, the principle that loss of state makes for an area of no-choice becomes the principle that the BIGGER THE LOSS of state, the LESS it is an area of choice. The bigger and bigger the loss of state, the less and less choice one has over seeking the preventive/ restorative product or service.
If your car requires a denting-painting job, there is loss of state, but not of high magnitude; correspondingly the force of no-choice is not very strong. It is possible to get by without restoring state for a few days or weeks. (This and other factors help to keep auto insurance (by and large) from becoming the horror story that healthcare is. The other factors are - a) mandatory insurance; b) the price of restoring lost state can be derived from, and is limited to, the price of gaining state.)
Thus choice and no-choice often have extent, and in such cases it is meaningful to talk in terms of 'more choice' and 'less choice' rather than 'choice' and 'no-choice'.
We may note here that medical requirements have magnitude, whereby in healthcare services, no-choice has magnitude. If you stub your toe, there is loss of state but the loss is small (and temporary), so the force to go to the doctor over it is small. There are numerous such losses of state that are small (and temporary) and present little compulsion to seek any service, meaning that they are not areas of absolute no-choice.
However, there are many areas in which the loss of state is so great as to leave the person with absolutely no choice but to seek a preventive or restorative service.
To keep the focus on the principle that there are two different KINDS of requirements, and to preserve the impact of the term 'no-choice' to describe the condition of persons who fear, or undergo, loss of state, we shall in general talk in terms of greater 'choice' and greater 'no-choice', rather than in terms of 'more choice' and 'less choice'.
PROPORTIONATE SERVICE
An important aspect of having choice over buying a product or service is the choice of quantity and/or frequency in which to buy it: you can buy as much or as little, or as big or as small, as you choose, and you can buy as often or as seldom as you choose.
The choice over quantity and/or frequency make for 'proportionate products' and 'proportionate services'. If the consumer's requirement can be proportionate, products and services will, in general, be made proportionate. If consumers can use big cars and small cars, businessmen will make bigger cars on the one hand, and smaller cars on the other hand. Consumers can choose from small cars, medium-size cars and big cars that cost less and more. This 'proportioning' is a significant aspect of the phenomenon of business creating choices for consumers.
Areas of choice are, in general, well-suited to be made proportionate.
Areas of no-choice are, in general, not well-suited to be made proportionate - and the greater the no-choice, the more badly suited they are. In seeking firefighting services, the customer cannot choose from small firefighting and big firefighting (though there can be big fires and small fires) - for every fire, there is a certain level of firefighting that has to be done within small limits of variation; lesser than that is no good (and more than that is no good either). And of course, the customer cannot choose how OFTEN he wants the firefighting service.
Where there is no choice possible of quantity and/or frequency, the service is non-proportionate.
Though there is magnitude in medical requirements, any given medical requirement cannot, in general, be met proportionally. By and large, it is all or nothing. If you have typhoid, a quarter of the course of antibiotics is probably just no good - you need the whole course. You cannot choose smaller antibiotics or less frequent antibiotics. (If you have a headache, however, a quarter of an aspirin is probably better than nothing, though it is not as good as a whole aspirin.)
On the other hand, MORE than the required course of antibiotics is not required, and is no good - it does not make for gain of state, it does nothing that the consumer would desire.
In areas of choice, 'more' (or 'less') is generally better. In areas of no-choice, this relation generally does not hold; 'more' (or 'less') is not generally better. (This does not mean that NO variations are possible; it just means that the possible variations are much smaller and fewer.)
We can generalize therefore, that areas of no-choice are non-proportionate, and areas of choice are proportionate.
With 'proportionate service' defined, we observe that the services provided by government are generally non-proportionate.
We can list all the things government provides to citizens, and ask for each -
can the thing be proportionate: can it be had a little more or less of, and can it be had a little more often or less often?
Consider the passing of laws; the protection of civil liberties and human rights; the providing of courts of justice; police and law enforcement; national defense; disaster relief; firefighting services; the preservation of forests and wildlife; the safeguarding of public health; the maintenance of a money system (which, along with other things, enables business to function).
On the other hand, we observe that the services provided by business are generally proportionate. We can list all the things business provides to citizens, and ask for each the same question.
STATE AND PRICE
There are states that can be purchased (ie bought for a price), and there are states that cannot be purchased.
As we saw in 'Business, Government and Services', life, liberty, human rights, way of life, community, national pride, natural and man-made resources are states. Family, friendship, optimism, skills and reputation are other states. These states have no price (and most likely cannot have any price).
For states that can be purchased, the price of the service for preventing loss of state or restoring lost state can, in general, be derived from (and limited by) the price of gaining it. For states that cannot be purchased, the service for preventing the loss of that state cannot be priced.
If it cannot be priced, it stands to reason that it cannot be provided by for-profit business. (Indeed, it is beyond the pale of economic theory.) Thus states such as civil liberties and human rights, as well as preventive and restorative services for such states, cannot be provided by a for-profit business.
On the other hand, we observe that the services that government provides are largely services that cannot be priced; again consider the passing of laws; the protection of civil liberties and human rights; the providing of courts of justice; police and law enforcement; national defense; disaster relief; firefighting services; the preservation of forests and wildlife; the safeguarding of public health; the maintenance of a money system.
We propose therefore that business provide only those products and services that (can) have a price, and government provide those those products and services that do not (cannot) have a price. (This does not mean that government necessarily has to provide preventive/restorative services for EVERY state that has no price.)
For the most part, areas of no-choice, areas on non-proportion and areas of no-price ARE ALL THE SAME.
A significant exception is general insurance - that is, insurance for cars, homes, factories, farms, art collections and so on. General insurance is a service for restoring loss of state, but state that can be purchased - it is therefore a gray area.
UP NEXT: Market and areas of no-choice.
BUSINESS, GOVERNMENT AND SERVICES
BUSINESS, GOVERNMENT AND SERVICES
Distinguishing the kinds of services that it is appropriate for government and business to provide.
Distinguishing the kinds of services that it is appropriate for government and business to provide.
By Desaraju Subrahmanyam.
KEYWORDS
State, gain of state, loss of state, area of choice, area of no-choice
ABSTRACT
Individuals and communities are viewed as having or existing in 'states'. With their states, individuals and communities can go in either of two directions - one, the direction of losing state, and two, the direction of gaining state. Loss of state and gain of state are related in different - indeed in opposing - ways to choice. Individual and community requirements fall into 'areas of choice' and 'areas of no-choice'. The kinds of services that it is appropriate for government and business to provide to the public are distinguished according to the 'area' they cater to.
1. STATE
'State' is loosely defined as having or being in a condition that is desirable or desired.
Nothing more - and certainly nothing formal - will be said here to make the definition rigorous. A clearer meaning of the term is expected to emerge from the way it is used, and that is deemed sufficient for present purposes.
It is emphasized, however, that 'state' has an essential component of desirability or being desired. Indeed, 'state' may be regarded as short for 'desirable state' or 'desired state'. There are many states whose desirability is controversial or philophically problematic, or both. But there are also many states whose desirability is neither highly controversial nor highly problematic. In the present discussion, we are concerned (it is hoped) with states of the latter kind.
States can be associated with individuals and with communities. (There are different levels of community - national, regional, local).
State has magnitude. The magnitude of state is proportional to the magnitude of the desirability of, or desire for, the condition that it refers to. Accordingly, there are higher states and lower states.
State can be gained or lost. At any moment, an individual (or a community) stands to gain state that currently does not obtain, or to lose state that currently obtains.
Money-value is often a useful measure of state, but not always. Many high magnitude states do not and probably cannot have any money-value. Therefore, magnitude of loss of state can sometimes but not always be determined by magnitude of money-value of state.
However, losing money in business is not loss of state; losing money in the stock market is not loss of state (a stock purchase is indirectly a business investment); losing in games or competitions of any kind is not loss of state; paying taxes, undergoing penalties and punishments imposed by courts of law is not loss of state; complying with restrictions imposed by lawful authority is prima facie not loss of state (though these restrictions may be challenged in courts of law).
There may be other conditions that do not count as loss of state. Indeed, there may be conditions of seeming gain of state that do not count as gain of state.
No principle is provided here for determining what is and is not a gain or loss of state (it is not required here).
Liberty, way of life, community, national pride, natural and man-made resources are 'states' (and external aggression makes for loss of these and other states).
Family, friendship, optimism, skills and reputation are other states.
Just as there are desirable conditions, there are undesirable conditions, that is, conditions that we desire NOT to be in. It is possible to propose a term, say 'anti-state', for such conditions. However, this is academic and rather superfluous for present purposes; 'loss of state' is interchangeable with 'anti-state'.
2. STATE AND CHOICE
'State' has a characteristic relation with 'choice'.
To be precise, 'gain of state' has a characteristic relation with 'choice', and 'loss of state' has its own characteristic relation with 'choice'.
Gaining state is intimately bound up with making choices. At any time, a person can always (and usually has to) choose from among many different states to gain. At any time a person may choose to go to a Mexican restaurant or an Italian restaurant or a Chinese restaurant.
Choice of state includes choosing no state, and this is an important aspect of choice. At any time, a person may choose to go to NO restaurant, preferring, say to eat at home or not eat at all.
Choice of state includes choosing the time of gaining it, and this is an important aspect of choice as well. A person may choose to go to eat out at a restaurant today or tomorrow or on Friday night, or not at any given time.
A person can choose state according to his resources and according to the timing of his resources; he can choose from among different expensive cars today, or he can choose a less expensive car today and choose to buy a more expensive car after three years.
Having choice itself is a state.
Based on these indicators (and possibly others), there are 'areas of choice' in society. An area of choice is characterized by personal decisions, preferences, goals, convenience, discretion and planning.
Loss of state, on the hand, is characterized by lack of any choice.
A person who is in any state has no choice in the matter that it has to be maintained; a person cannot say of any state of his or hers, "I do not really care about having that; it makes no difference to me". If he or she does, it is not a state at all, as being desired is essential for anything to be a state.
A person who has lost any state has no choice in the matter that it has to be restored; a person cannot say of any state he or she has lost, "I do not really care about getting that back; it makes no difference to me".
A person who loses a state cannot be said to CHOOSE the service that restores it. A person who is drowning cannot be said to choose being rescued.
There is also no meaningful choice in the manner or the means of restoration.
Restoration of state occurs - and has to occur - in accordance with the prevailing knowledge and technology, through established procedures or best practices, which are known or regarded to bring maximum restoration possible with minimum loss of other states or side effects. But a person cannot really be said to 'choose' it when he requires a service that does this. It is meaningless to assert "I choose maximum possible restoration with minimum possible side effects"; it has nothing to do with choice and is really a trivial assertion.
To a person trapped in a burning house it is irrelevant what equipment or techniques the firemen use to save the person; just about anything they use or do is irrelevant. Considerations such as not using abrasive gloves that injure the person, or ropes that are unsafe and can snap, or bringing the person out using unnecessarily risky stunt-like maneuvres are not really about choice at all.
A person who is in any state has no choice over the time at which the state is maintained, or restored when it is lost. When a person is in any state, he or she requires it to be maintained all the time, and when a state is lost he or she requires it to be restored immediately. A person trapped in a burning house needs to be rescued NOW.
Based on these indicators (and possibly others), there are 'areas of no-choice' in society. An area of no-choice is characterized by personal duress, desperation, loss, inconvenience, urgency and abruptness.
3. AREAS OF CHOICE AND NO-CHOICE
By and large, biological requirements are areas of no-choice - food, air, water, clothing, shelter; the significant exception is sex, which is an area of choice. Why is that so? There is no loss state by not having sex. On the other hand, a person can choose to have sex with X or Y or Z, or with none at all (the person may prefer to watch football on TV). A person can choose to have it now, or later, or not at any given time. So sex is about gain of state, and is an area of choice, though the inability to gain it can be frustrating and painful.
Marriage and starting a family are, similarly, areas of choice.
Often, areas of choice and no-choice are indentifiable, not with this or that category of things, but with the state and magnitude of state gained by them. There is no choice in having clothes and footwear, especially warm clothes and shoes in winter; yet there is a large area of choice in clothing and footwear FASHION, which is not the same thing. There is no choice in having food to eat, but there is a large area of choice in fine dining.
As society progresses, that is, gains more and more states, more and more areas count as areas of no-choice. That is, there are more requirements for maintaining state and preventing loss of state.
For example, city roads, electricity and K-12 education are areas of no-choice in modern society. People use city roads not because they choose to, but because in modern society they HAVE to get from place to place in a city (and often between cities); if they cannot use the roads there will be loss of state. Remembering that state has magnitude, we can understand that there is less and less choice in moving over relatively small distances - say within a city. Similarly, there is less and less choice about people having lights and heating in the house. And there is less and less choice about people having primary and secondary education - to participate in a modern, high state society individuals MUST have basic education.
However, how people travel over the roads can be a matter of choice - walk, bicycle, public transport, private transport; at the high end, what kind of private transport people use is largely a matter of choice. And there is more and more choice about moving between cities, states and countries. Similarly, there is a large area-of-choice in the use of electricity, and in undergraduate and graduate and yet higher education.
With cultural and technological progress in society ('social progress'), areas of choice as well as areas of no-choice increase and diversify for individuals and communities.
4. GRAY AREAS AND OVERLAPS
As reality is not cut-and-dried, it does not always fall neatly into areas of choice and areas of no-choice.
That is, it is not always a simple matter to identify choice and no-choice in real situations; therefore there are gray areas of choice.
However, there are significant areas that fall largely to one or the other side, and are not entirely gray.
Aspects of choice and no-choice may overlap in products and services.
As state has magnitude, small choices sometimes overlap with large no-choices and large choices sometimes overlap with small no-choices.
Also, as state has magnitude, there is a band of small states whose gain and loss is trivial to discuss, and to identify with areas of choice and no-choice.
5. GOVERNMENT
We now come to the normative part of the essay.
It is proposed that the kind of services that it is appropriate for government to provide are services in areas of no-choice.
That is, the proper kind of services for government to provide are services that prevent loss of state or restore lost state (including states that have been gained through services provided by business, such as cars and homes).
All the familiar things that government does can be seen as efforts to MAINTAIN state, and RESTORE state: passing laws, including laws to protect the environment; providing courts of law; police; national defense; disaster relief; firefighting services; regulating business, so that business activities do not bring loss of state to anybody, including antittrust regulation that checks businesses from preventing others from gaining state.
However, proposing that it is appropriate for government to restore lost state is not the same as proposing that every lost state has to be restored by the government.
There is a set of states that government happens to be responsible for maintaining and restoring at any time and place ('place' being country, state and district); government providing preventive/restorative services beyond the prevailing ones is the stuff of genuine public debate over public policy - it is the stuff of genuine politics and genuine election promises. IT IS IN PRINCIPLE NOT INAPPROPRIATE FOR GOVERNMENT TO PROVIDE ANY PREVENTIVE/RESTORATIVE SERVICE to individuals and communities.
Government-provided services may be either free of charge or not-free of charge. No attempt is made here to determine which government services should be free-of-charge and which should not be free-of-charge. The point is simply that 'government-provided service' does not necessarily mean 'free service'.
Given that there are gray areas, and that society progresses, government may identify areas of preventive / restorative services beyond the prevailing ones; for example, affirmative action and public transportation are gray areas; public access to new technologies like the internet may become required on account of social progress, and investment in backward areas may become required on account of uneven social progress. A case can be made for loss of state in such cases. This again is the stuff of genuine public debate over public policy - it is the stuff of genuine politics and genuine election promises.
Such issues involve myriad details which do not concern us here. Does government directly provide jobs in affirmative action, or provide incentives for it (such as scholarships on the one hand and tax breaks for businesses on the other)? Does goverment directly invest in backward areas or provide incentives to industry to do it? Should public transport be a government service or a regulated business? Should it be free, subsidized, at cost or cost-plus? Should the government provide internet service to homes or make it available at public libraries?
Given that areas of choice and no-choice overlap in products and services, those aspects of products and services that relate to loss of state should be subjected to high government regulation.
It is proposed that government should not DIRECTLY provide to the community or to individuals, services for gain of state, or in areas-of-choice; the more it is clearly an area of choice, the more government should keep out of it. It should not engage its officials to do this and it should not engage or own corporations to do this or that do this.
It makes no sense for government to provide commercial gain-of-state services to the public. Government is terribly inefficient at this, and in relation to this right wing commentators have a valid point.
However, government can indirectly provide or promote gain of state by giving incentives to businesses and individuals. That is, there is a layer of business insulation (of real free enterprise) between government and the public in these areas. BUT BECAUSE THERE ARE GRAY AREAS, PUBLIC DEBATE IS REQUIRED AND SHOULD BE CONDUCTED IN TERMS OF - WITH RESPECT TO THE QUESTION OF - WHETHER OR NOT A PROPOSED GOVERNMENT SERVICE ENCROACHES ON AN AREA OF CHOICE. PUBLIC DEBATE SHOULD BE OVER THE CLARIFICATION OF AREAS OF CHOICE AND NO-CHOICE, OR ALTERNATIVELY, ABOUT SHAPING PUBLIC OPINION ON THE QUESTION.
The principle that it is appropriate for government to provide preventive/restorative services, has the implication that insurance is properly a government-provided service. This means ALL kinds of insurance - be it for vehicles, homes, factories, art collections or farms. However there are nuances, to be discussed in coming posts.
At the same time, ordinary prudence on the part of citizens is not discounted; if government provides preventive/restorative services, government will promote or enforce prudence and ordinary caution to prevent loss of state in all areas, such as driving safely on the roads and conforming to fire codes in buildings.
6. BUSINESS
It is proposed that the kind of services that it is appropriate for for-profit business to provide are services in areas of choice.
That is, the proper kind of services for business to provide are services that provide gain of state.
All the familiar things that businesses do can be seen as efforts to provide gain of state: making cars, producing movies, publishing books and music, running restaurants, staging sporting events and fashion shows, building and managing vacation resorts.
Businesses promote gain of state by CREATING CHOICES, and thus fit services in areas of choice like a glove.
It is proposed that business (that is, commercial, for-profit enterprise) should not DIRECTLY provide to the community or to individuals, services for preventing loss of state or restoring lost state. Just as it makes no sense for government to provide commercial gain-of-state services to the public, it makes no sense for business to provide commercial fire-fighting services to the public.
The use of the profit motive to service conditions of loss and duress seldom works and distorts the service. When we see businesses engaged in such services, we are reminded of what Brand Hauser (John Cusack) cynically says in the movie 'War, Inc': "Business is the uniquely human response to moral or cosmic crises."
Given that business is suited to providing services in areas of choice, the corollary is that there is no genuine business that 'cannot be allowed to fail'. If at any point it is discovered that there is a business that cannot be allowed to fail, something that should not happen has happened. It signals a failure of regulation or the need for new regulation. A business that cannot be allowed to fail represents a business that is in a position of bringing loss of state, which violates the principles proposed here. Hence government in its role of preventing loss of state must regulate business such that none becomes one that cannot fail; as there is continuous progress in society this regulation is a continuous activity.
When a business fails, it means the customers will be unable to gain state from it; but inability to gain state is not a condition that is of concern here. The employees and the owners/promoters of the business will either be unable to gain state, or will lose state. If they lose state government action is called for, not to prop up the business, which is clumsy and beside the point, but in the form of unemployment benefits, which are simple, efficient and to the point.
7. GOVERNMENT AND BUSINESS
The separation between government and business in providing services to the public need not be watertight.
Government may provide its services directly to the public, or by engaging business (public works function on the second model).
Fire-fighting is properly a government service, but the government may engage a private contractor for the purpose. The contractor however will have no commercial dealings with the public, and particularly with the people he or she rescues. (The immediate problem is that contractors and corrupt officials can scam the system; but it cannot be said of any proposal that it is unacceptable simply because it can be scammed; the question rather is how to prevent scamming.)
This means that business can prevent or restore loss of state on behalf of government or under government contract. That is, there is a layer of commercial insulation (of real government) between business and the public in these areas.
Government may even own corporations through which to provide services to the public. And these corporations can even be profit making, or managed and given incentives to be profit-making, but they are not FOR profit, that is they do not exist for the PURPOSE of making profits. (To be precise, these corporations have to be efficient, and profit can be an indicator of efficiency - though it is only one indicator out of many possible).
For its part, business may sell to the public for-profit, or to the government for-profit (defense industries function on the second model).
The summary of the proposals here is to get (and let) business do what good businesses do best - providing services to individuals and communities for gain of state; the classical capitalist model based on the profit motive, competition and growth of demand makes eminent sense when capitalistic enterprise caters to areas of choice; it makes no sense and is a disaster when applied to areas of no-choice.
And let (and get) government do what good governments do best - providing services to individuals and communities for preventing loss of state and restoring lost state.
UP NEXT: Services, Proportion and Price
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