Tuesday, July 10, 2007

Greed Isn't Good or Bad

Now that Sicko is out, the charge of being greedy has once again been leveled at businesses--in this case, health care insurance companies. This spring I had an extended conversation with a colleague in philosophy who was concerned with the greed of big businesses who lay off workers. I find this line of argument bizarre.

Companies selling, say, homeowners insurance are also trying to maximize their profits. The company that built this computer I'm currently using didn't build it because they care about me; they did it because they wanted profit. The workers who provided their labor to build the computer also don't care about me; they wanted income. Greed motivated all these actions, as well as the ones that resulting in my clothing, my food, my house, my furniture, and all sorts of other goods and services. Greed built all these things.

So is greed good, in the words of Gordon Gekko? Or to put it in Randian terms, is selfishness a virtue? No, those arguments are also too simple. A greedy fisherman in an open access fishery (i.e., one with no property rights in fish--no one owns the fish, and anyone can catch them) catches too many fish. An insurance company that loses money on persistently or predictably unhealthy patients, and therefore denies them coverage, is also being greedy. A polluter--including you when you drive your car or ride a bus--is being greedy. Greed is not the problem. Self-interest is an inescapable aspect of human nature. To assume that humans will not be self-interested is to deny reality.

To an economist, self-interest is neither good nor bad; it just is. What can be described as good or bad is the institutional arrangment--the set of incentives in which people pursue their self interest. In the market for computers (or clothes or food or whatever) businesses work hard to satisfy customers, and do a fairly good job. Competition restrains the firms from misbehaving. In the open-access fishery, however, competition and lack of private property results in overfishing. The polluter does not have to take into account the damage he or she causes, and therefore overpollutes. The difference does not lie in the people. That is, the people who provide me with a computer that I want are not virtuous, selfless people, while the polluters are not evil, selfish people. They simply face different incentives. They may even be the same people, acting harmfully in one context (perhaps polluting while producing computers) and acting helpfully in another (providing me with a computer that I want).

Saying that "greed is bad because greed sometimes results in bad outcomes" is like saying "hair dryers are bad because when they get wet they can cause deadly electrocution". The lesson to take away is not that greed is bad or hair dryers are bad. The lesson is to make sure that you use each appropriately. Don't use your hair dryer in the bath tub without expecting a shock. Similarly, don't allow pollution to be produced without cost to the polluter unless you are willing to live with the excess pollution. The solutions: Use the hair dryer outside of the bath tub. Assign a fee to pollution to force polluters to take into account the damage they cause (or, equivalently, institute a tradeable permit system).

In the case of health care, the real problems are:
1) Adverse Selection.
2) Moral Hazard.
3) The tax system's treatment of employer-provided health insurance.

There may be other problems (regulation, malpractice lawsuits and insurance--these are less clear), but those listed above are the roots of the high cost of health care in the U.S. We'd be better off with a discussion of how to address these problems, rather than denouncing insurers as greedy.

Now if you're reading this and thinking "What the heck is Adverse Selection?" I have to wonder, what is your next step? Will you actually try to figure out what I'm talking about (notice that I have omitted any links that might explain these terms), or presume that this is some economic nonsense and go about your life? The latter is probably a safe strategy, but if that's your choice, please, please, won't you refrain from having an opinion on health care? Ignorance can be rational. Irrational bias can even be rational (see my blog entry on Bryan Caplan's Myth of the Rational Voter). But the intellectually honest thing to do is to recognize your ignorance, or your bias, and remain agnostic on the issue.

Or you could read up on the subject, if you are so inclined. Tim Harford's Undercover Economist has an excellent treatment of health care economics for the layman (it also covers many other subjects). I've adapted the book as a supplementary text for Econ 101 for the fall. It also has the virtue of being pleasant to read.

4 comments:

AKT Groups said...
This comment has been removed by the author.
The said...

Dear Mike ,

Thank you for sharing your thoughts.

Have you had the chance to view Sicko yet?

Mike Hammock said...

Admittedly, I have not seen the film. Very rarely do I go see films in theaters; I usually use Netflix or just buy the DVD. I have seen the trailers, clips from the film, and several interviews with Michael Moore about the film. I have also read online articles by Moore on the subject. I'm glad that there is a conversation over the problems with health care, but as far as I can tell, the discussion is not going to be productive unless it changes quite a bit. Some of this, I think, is the fault of economists, who should be leading this debate. Instead we seem to be mostly talking to each other.

Also, for anyone curious about how a health care system designed by economists might look, consider Singapore. Just Google "Singapore" and "Health Care System" and you'll get several interesting results.

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