Arrow on health care Notes for September 19

Why did we do that?

I suppose the chief question about this is “why did we read it?” The first part of the course is a mini political philosophy class that pays special attention to freedom and markets. But Arrow’s article is from an economics journal. So what gives?

Of course, part of the point of PPE is that philosophers, political scientists, and economists frequently work on the same problems. Those who are interested in social life, we think, should draw on a variety of sources.

This particular article does two things for us. First, it makes a case for competitive markets on the grounds of what Pareto called ‘efficiency.’ Second, it illustrates some limitations of that approach.

The Principle of Efficiency is a descendant of utilitarianism. Those who accept it share the view that good and bad consist, roughly, in the satisfaction of preferences or peoples’ getting what they want.

The Principle of Efficiency is much less ambitious than utilitarianism when it comes to right and wrong. It only claims that an efficient distribution is better than an inefficient one. That is, if there is a way to make some people better off without making anyone worse off, it claims that is what society should do. There is no suggestion that society ought to be in the business of bringing about the greatest good overall. It doesn’t deny that this is what society should do either. It’s not supposed to be a complete account of right and wrong. It just makes one, seemingly innocuous, claim.

The limitations

One of the chief limitations of the Principle of Efficiency is evident almost from the start. It says that under certain circumstances a competitive market will lead to an efficient distribution. But it says nothing about how things are distributed prior to the market. We can let our normative thinking run wild there. We can take from the rich and give to the poor, insist that people start with what they made themselves, or anything in between.

As we will see, that is one of Rawls’s criticisms. He thought it was necessary to have standards of right and wrong that said more about the proper distribution of goods.

The bulk of Arrow’s article is about how competitive markets in health care do not achieve an efficient distribution. That’s a second kind of limitation. Even if you accepted the ethical significance of the Principle of Efficiency, in other words, you would not believe in competitive markets for everything.

There are deeper criticisms of the Principle that we did not touch on. For example, it is hard not to notice that, in practice, the Principle is invoked for conservative ends when it is, in theory, neutral on most ethical questions. That looks fishy.

Second, in-kind transfers frequently violate the Principle even though they are ethically favored by most people. We would rather give health care than cash. The in-kind transfer is inefficient, since there is a way of satisfying more of the recipients’ preferences without taking any more from the donors, namely, by giving the recipients cash and letting them buy whatever they most want. But most of us insist on paternalism where basic needs are concerned: we insist that transfers provide food, shelter, and health care even if providing these things directly is inefficient.

Both criticisms can be found in a very interesting article on Arrow’s piece by Uwe Reinhardt.** Uwe E. Reinhardt, “Can Efficiency in Health Care Be Left to the Market?” Journal of Health Politics, Policy and Law, 26(5) (2001): 967–992.

Arrow’s sociological thesis

One of the things that I thought was interesting about the article was its claim that we have used various ethical norms to fill the gaps left by the absence of working markets in health care and health insurance.

The efficacy of such norms was the subject of a very influential article by Atual Gawande on the difference between two towns in Texas. In one, the doctors regarded themselves as businessmen; in the other, they didn't. Guess which one had the higher costs!†† Atul Gawande, “The Cost Conundrum” The New Yorker June 1, 2009.

Arrow himself gave an interview to The Atlantic Monthly in 2009 that touched on health care. (The Affordable Care Act, aka Obamacare, was still being debated at the time.) In that interview, he said that he believes that many of the norms he described are breaking down.

This page was written by Michael Green for Freedom, Markets, & Well-being, PPE 160, Fall 2012. It was posted September 19, 2012.
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