Why Freakonomics Freaks Me Out

Steve Levitt's ideas about supply and demand in health care are freaky, and not in a good way.
Hard to value. 

The law of supply and demand offers a useful insight: Typically, if you reduce the price of something, people will buy more of it. Unfortunately, some economists can't help but take the idea too far.

"Freakonomics" authors Steven Levitt and Stephen Dubner tell a story in their new book, "Think Like a Freak," about meeting David Cameron before he became the U.K. prime minister. They tried to make him see the folly of the taxpayer-funded National Health Service, through which people get treatments free of charge. They explained that the market for medical services is just like any other market, and it can't work right unless patients have to pay.

As Levitt, a professor of economics at the University of Chicago, summed it up: "It doesn't take a whole lot of smarts or a whole lot of blind faith in markets to recognize that when you don't charge people for things (including health care), they will consume too much of it."

Maybe Cameron lacks smarts, because he abruptly ended the meeting. Far more likely, he's intelligent enough to know a juvenile ideological argument when he sees one, even if it's made by someone who ought to know better. Economists have understood for years that medical services aren't simple "goods" such as apples or automobiles, and that free markets for such things don't work very well.

The trouble is an imbalance of knowledge. Most of us don't know enough about medicine to diagnose our own problems. That gnawing pain in your gut might be nothing, or it might be a sign of something more serious. If it persists, you'll need medical experts, aided by technology, to identify the problem, just as you would need an expert mechanic to discover what's wrong with a car that won't start or a refrigerator that won't cool.

Experts know more than you do, so you're at their mercy when purchasing their services. You can only hope the doctor will prescribe the right tests and treatment. Did you really need that $3,000 magnetic resonance imaging scan? What about those super-expensive pills, allegedly to protect your stomach lining? Even after you recover, you still won't be sure what part of the treatment was really necessary.

Consumers cannot possibly buy something intelligently if they don't know what they want or need, and they can't properly judge whether what they bought was worth it. Hence, such "credence goods" aren't subject to typical market forces. Reaching the right amount of consumption at the right price requires lots of extra things such as better knowledge on the part of consumers (which is often impossible), ways to verify the quality of treatments (often difficult or impossible), or ways to hold experts liable for mistreatment (either impossible or impractical).

Levitt's and Dubner's vision has other flaws. Price may well deter people from seeking treatments that we actually want to encourage. What if, for example, we let vaccine manufacturers sell their products in an open market, rather than requiring parents to vaccinate their children against diseases such as polio or measles? Many would certainly choose not to pay $200 for a series of shots. The market would find its equilibrium, guaranteeing sporadic epidemics of easily preventable diseases.

No wonder many people are deeply suspicious of economists. We hear way too much cheerleading for the notion that markets can solve all our problems and way too little about the complexities we face in trying to supply things such as credence goods to the people who need them -- which is all of us. Too bad, because this is economics at its best.

The myth of easy solutions through free markets is endlessly appealing. It makes the complicated seem simple and avoids facing up to real trade-offs. This may be freaky thinking, but not in a good way.

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