Over at Econlog, Arnold Kling chides me for the way I concluded yesterday’s post on health care and Harvard Professor David Cutler:
My gut instincts point me in a different direction that Professor Cutler’s do, but I think we agree on what the big problems are and on what would count as solutions. I think almost all economists would agree on that much, and that’s a lot.
Here is Arnold:
My disagreement with Cutler is more than mere gut instinct. Cutler and I might agree that there is overuse of medical procedures with high costs and low benefits. We might agree that incentives affect this. However, Cutler is confident that central planning represents the solution, not the problem. He believes that remote bureaucrats can measure health care quality well enough and implement compensation schemes that are fine-grained enough to achieve significant improvement.
For the record, Arnold and I are saying the same thing, though I tried to say it a little more politely. David Cutler, Arnold Kling and I all agree that incentives matter and that it’s important to get them right. Arnold Kling and I agree that David Cutler probably doesn’t know how to do that.
Cutler, for example, believes we can realize huge savings by streamlining hospital adminstration but has absolutely no story to tell about why hospitals haven’t chosen to realize those savings for themselves. Here’s what I said yesterday:
First, he talked about the explosion in administrative costs in American hospitals. Duke University Hospital, for example—one of the finest hospitals in the nation—has 900 beds and 1300 billing clerks. We have to give them an incentive to do better, he said. When I asked why they don’t already have all the incentive they need to save money, his first response was that “hospitals are mostly non-profits”. That’s of course an economist’s answer, but I found it deeply unsatisfying—even at a non-profit, there’s always some alternative use for funds, and usually someone with an incentive to economize in favor of that alternative use. So more than Professor Cutler, I am inclined to suspect that those 1300 billing clerks might actually be doing something useful.
If Professor Cutler can’t explain why Duke chooses to employ all those billing clerks, how can he possibly know how well we can get by without them?
So don’t worry, Arnold; we’re on the same side. William F. Buckley once said he’d rather be governed by 100 people chosen at random than by the Harvard economics faculty. I’m not sure I’d go that far, but if I had to be governed by an economics faculty I’d choose George Mason over Harvard in a heartbeat.
“but if I had to be governed by an economics faculty I’d choose George Mason over Harvard in a heartbeat.”
Except maybe for the Austrian contingency at GMU. I just recently read the below essay by Brian Caplan, and if it is a true representation of what Austrian school economists believe, then I would stick with the phone book.
http://economics.gmu.edu/bcaplan/whyaust.htm
Steve,
I think Arnold’s bigger critique was of your use of “almost all economists would agree.” If anything should be clear in the economics profession over the last year is that even on “slam dunk” issues, economists still don’t reach a strong consensus.
I see people (so not just you) writing “most/all/a lot of economists agree” on blogs all over the place for various topics, but they never offer supporting evidence that the statement is true.
Economists do not like it when politicians claim “all economists agree on X” without evidence of it being true. Economists take out ads in print to voice their disagreement. Economists should hold themselves to the same standard.
thedifferentphil – did you actually read the body of the essay or just the title?
In this case though, the “all X agree” was largely about the methodology of how to examine and acknowledge a problem. Cutler may have very different ideas about the limitations of government policies, but at least he agrees that there are things called incentives and that it’s important to get them right, and that if we get them wrong then the system could end up being disastrous.
That’s at least a basis for arguing with him that his policy ideas might well get things wrong. I’m not sure many proponents of HCR would even acknowledge that a situation in which we all were made to pay equally huge portions of our income (whether directly or through taxes/fees) to get extremely robust coverage is a disaster.
Yes, I did read it: did you? Believing that use of continuous functions makes standard neoclassical economic modeling invalid; not believing that indifference is as a valid concept; econometric analysis is not valid because the past is never repeatable so nothing learned past statistics can inform our current economic state; denying the existence of public goods, etc. There are many reasons to criticize modern economics, but this just seems crazy to me. Maybe Caplan did not represent Austrian economics properly.
Sorry – I didn’t want to cause an argument. I have too much respect for this particular blog to start fighting in the comments section.
I just thought your implication that you would rather use a phone book for economic enlightment over Austrian analysis was a way harsh reflection of what Caplan actually wrote.
But perhaps you used Caplan’s piece as a starting point to extend your own analysis of Austrian economic’s short comings and conclude that school of thought is useless even though the writer of the piece didn’t even come close to saying anything resembled that point of view….which is fair enough.
I just happen to disagree.
I find it ironic/funny that those who are for Keynesian style “spend till you win” economics somehow manage to forget that we’ve been employing this concept since the early teens of this past century (institution of the Fed Reserve). How can one even begin to argue for such an economical model when we are in this mess because of that model to begin with? Yes, yes I know. Keynesian’s got us out of the great depression (what was it, about 16 years after the initial start?) So clearly their method is tried and true OR you could read the other side and figure out how those policies only exacerbated the problems.
p.s. I’m not saying anyone is arguing for/against Paul Krugman style economics, but since the Austrian school is as far from that style as you can get, I’d say the hope is that there is something better than the Austrian style. I’ll say the day we’ll know that is after we implement an Austrian style (no fed, no welfare state, no warfare state, etc) and things get worse.
Speaking of Krugman, I may be crazy, but his latest piece seems to a) not make any sense to me b) be diametrically opposed to something I could see him writing in the 90s.
http://krugman.blogs.nytimes.com/2009/12/16/would-cutting-the-minimum-wage-raise-employment/
In it, he argues that cutting the minimum wage is a bad way to raise employment. I can’t really follow his arguments about the effects of liquidity, but I’m not sure how he gets from reducing the minimum wage to “reducing wages,” let alone a “general cut in wages.”
I wasn’t trying to start an argument either, but this is a blog supporting a pro-math book and the Austrians sound irrationally anti-math. Also, not wanting to be governed by someone who believes in Austrian economics (as presented by Caplan) is definitely not the same as supporting Krugman. While I may agree with some Austrian conclusions, I can’t really respect the methodology (again from Caplan) that draws those conclusions.
thedifferentphil-
Considering that Caplan is an anarcho-capitalist you don’t have to worry about him governing you.
Take that back, I misread you. But considering that Austrians are libertarians you don’t have to worry about them governing you either. The economics department at George Mason definitely understands markets and liberty.
I am not really worried about either a Harvard econ department junta or a GMU econ department junta ruling me, so we are in the world of the hypothetical. In my ivory tower, liking the political conclusions of a school of thought are not a sufficient reason to embrace what appears to be nonsensical view of economics. It would be like a strong believer in God embracing the theory of intelligent design, because the conclusions of I.D. support the existence of a god. The I.D. theory is nonsense, but if it supports one’s belief in God, then you better not criticize it. There are many defensible reasons to have libertarian political beliefs, but Austrian economics is not one of them.
I think you are focusing on the flaws despite the wide breadth of great work. Have you read Hayek, Mises, Rothbard, Menger, or Hazlit? There’s so much good stuff, I recommend that you give it a shot even if you agree with Caplan’s critique. “Austrian economics” is far from homogenous.
I have read Hayek and Mises. Hayek I enjoyed reading. Mises, not so much.
Phil: Libertarian political beliefs essentially say government shouldn’t intervene in your life.
Economics helps decipher what the effects are of different interventionist policies.
I doubt that there is a better explanation of the inevitable boom bust effect after the government artificially expands the money supply and set interest rates than the Austrian Business Cycle Theory. Do you think there is a better explanation?
If not, then ABCT should go a long way to defend the libertarian non interventionist point of view (at least in the monetary system).
Cutler’s argument that “hospitals don’t minimize costs because they are (mostly)nonprofits is absurd. “Nonprofit” status means you don’t have stockholders who act as residual claimants on income. It DOESN’T mean that you are indifferent to the existence of those profits, as Kling points out. Indeed, even if we posit altruistic motives to nonprofits, they can do more “do gooding” (e.g., charitable care), the bigger the volume of profits they extract from paying customers. Moreover, the empirical literature on hospital competition makes it abundantly clear that the differences between for-profit and non-profit hospitals are minimal. Presumably Cutler knows this (and if he doesn’t, he shouldn’t be opining on this issue).