Bureaucracy and Markets

...For the HMOs, it is much easier to lower per-patient medical costs by enrolling healthy patients than by treating sick ones more efficiently...

...From this point of view, neither markets nor bureaucracies can be taken for granted—both must be understood as the products of particular circumstances and power relations...

...But patients enter the medical care marketplace without knowing what they want to buy...

...Opponents use administrative challenges, lawsuits, and political pressure to obstruct projects they don't want...

...This process reached its apotheosis in the Clinton health care program...

...The liberal version of this faith expresses itself in the will to solve problems piecemeal with regulations and bureaucratic programs...

...FALL • 1995 • 533 Notebook A segment of the American economy in which the linkage of market and nonmarket coordination is especially conspicuous is land development...

...Structural change is a far better remedy for economic unfairness than the creation of bureaucratic obstacles to the existing structures' efforts to get things done...

...One could analyze other parts of theAmerican economy in much the same way...

...Not long ago, health care was provided primarily by nonprofit hospitals and by individual doctors whose income was little affected by competitive forces...

...Developers fight back with promises of economic bounty, with lawyers, and with political influence cultivated by the legal and illegal distribution of cash...

...And the implications of this thinking are far removed from the simplistic market worship that so many, in East and West alike, have taken up to replace shattered preconceptions...

...Serious students of communist economics have focused on elucidating the mechanism of central planning...

...it was a question of economic efficiency as well...

...It grew out of particular features of communist society, such as overemphasis on military production and excessive secrecy, which reflected the autocracy's compulsion to protect and enlarge its political power...

...A similar analysis can be applied to health care...

...In other words, in this market the seller and not the buyer determines the demand...

...It arises from the response to new circumstances of a labor market whose rules are determined through political and economic struggle between workers and owners...

...When the population insured by for-profit organizations ages, these organizations in turn will become vulnerable to yet newer competitors...

...The opposition to development expresses itself most effectively as a frictional force, raising objections, calling hearings, forcing delays, and instigating lawsuits...

...So they use discriminatory pricing where the laws allow it, and targeted marketing where they do not, to seek out the young and healthy...

...But it's easy to foresee that big-business HMOs will—if they can't jettison their sick enrollees— get the government to change the rules of the game before they themselves go under...

...Such industries as television, aviation, and telecommunications owe their very existence to manifestly artificial governmentdefined rules...

...As with Soviet reforms of consumer-goods industries that ignored the basic problem of making producers respond directly to consumer demand, many of these "reforms" only replaced one perverse incentive with another...

...One such reform, initiated by federal law, has been the creation of profit-making health maintenance organizations (HMOs...

...Planning agencies, seeing the resulting damage, propose ever more elaborate mechanisms to direct development into more beneficial channels...

...Today, profit-making HMOs can offer lower premiums than nonprofit organizations with more scruples and an older, sicker membership...

...The very existence of a market for medical care is politically determined and is largely a development of the last few decades...

...the matter is more subtle...

...Local opposition rarely leads elected officials simply to vote to stop a development project...

...The point here is not to join in the current mania for unthinking deregulation...

...The results of decontrolling land use and health care would be even worse than what we see now...

...And, since both market and bureaucracy are mechanisms of coordination, economic success requires that both be organized so as to create incentives for independent economic actors to behave in ways that contribute to overall well-being...

...But the increasing complexity of these arrangements only strengthens the drag exerted by frictional resistance, with the paradoxical result of ever greater tendencies toward gigantism and sprawl...

...What development does occur in built-up areas tends toward gigantism, because only the largest projects can generate sufficient profits to overcome the fixed costs of the approval process...

...Established nonprofits find it hard to compete, and some, like Washington's Group Health Association, have collapsed under the pressure...

...The study of communism reveals that the administrative apparatus of "planning" must be understood as an arena for the clash of interests rather than a mechanism that automatically performs assigned tasks...

...The implications of this finding go far beyond the study of communism and require a rethinking of market economies as well...

...The doctor tells them whether they need an appendectomy or an antacid...

...The cost of reformers' compromise with corporate interests is not just the incomplete attainment of goals...

...The real options are market and administrative coordination of economic activity, with any viable system having considerable elements of both...

...Even churches are no longer welcome in some suburbs...

...Ever more complicated schemes are hatched to reconcile corporate interests with social needs, with little heed paid to FALL • 1995 • 535 Notebook the costs and unintended consequences of bureaucracy and complexity...

...Development proposals generally must pass a series of administrative hurdles aimed at ensuring their conformity with the plan...

...The interaction of these buyers with sellers trying to maximize their earnings results in an efficient allocation of resources...

...Efforts to control these costs have tried to use market forces rather than confronting this incompatibility head-on by setting budgets for health care expenditures...

...In neither its Stalinist nor its Brezhnevite variety, they find, did the planning mechanism represent a rational allocation of resources according to economic criteria...

...Like a market, the communist "planning" apparatus is best understood as a mechanism by which the self-interested actions of many entities aggregated to define the behavior of the society as a whole...

...We misconstrue the lesson of that system's collapse unless we analyze the legal and organizational structures of capitalist markets in the same way...

...The HMO system has a predictable dynamic leading from revolution to sclerosis...

...And economics cannot limit itself to the analysis of markets...

...The American mania for green lawns and rich neighbors, abetted by racial prejudice and real and imaginary fears of city life, drives affluent suburbanites to try to stop almost any new building that might enter their surroundings...

...Compare carefully planned suburbs with those where controls are lax, and imagine the unconstrained behavior of health-care behemoths...

...Surely the American people were not all wrong— however much their mistrust was artificially inflamed— when they rebelled at the byzantine structures devised by Clinton's brain trust...

...As Rashi Fein has pointed out, a basic assumption underlying theories of economic competition does not apply to medicine...

...These battles have made land development a defining issue in grassroots politics, with a significance that extends to the national scene...

...Development is driven into areas where there are no opponents, promoting soulless and ecologically harmful suburban sprawl...

...It must study the internal workings of complex organizations that carry out economic functions, and then must investigate how the structures of markets and organizations are determined...

...The consequences are often the opposite of those the planners intended...

...As with communist planning, the results of American land-use planning are often determined less by its ostensible objectives than by the political and administrative functioning of the planning mechanism That developers can get their way by buying local politicians, although often true, is not the main point...

...Both market and nonmarket institutions of economic coordination must be analyzed to uncover the social forces that determine supposedly objective rules...

...The system of land-use "planning" and allocation in the United States is ripe for demystification by the same methods that have been applied to "planning" in Eastern Europe...

...Rather, it is that economic structures must be viewed as a whole, taking into account the interactions of political, bureaucratic, and market forces...

...In theory, buyers enter markets to obtain what they want 534 • DISSENT Notebook on the most advantageous terms available...

...One of the most striking lessons from detailed observation of centrally administered economies is the persistence of the individual enterprise's pursuit of its own interests in the context of a system supposedly designed to discourage self-seeking...

...Reformers must analyze economic mechanisms in their entirety, and must alter them in the direction of efficiency as well as fairness...

...it is also the added burden of bureaucracy and inertia created by excessively complex institutions...

...Two Examples As readers of Dissent need not be reminded, the recent growth of income inequality in the United States is not a natural process of adjustment to change...

...The role of private business interests in these and other markets is not a given, but something that is determined by history, culture, law, and the conscious and unconscious decisions of our elected representatives...

...Plan-andmarket, counterposed for more than a century by both friends and enemies of capitalism, seems clearly to be a false dichotomy...

...Rather, it was a system of bureaucratic bargaining that reconciled arbitrary directives from the top with the needs and desires of individual enterprises...

...New healthcare organizations have lower costs, not through efficiency, but because they have fewer sick people running up bills...

...Land development is governed by a system of local zoning or "land-use planning" that limits the kind and amount of building allowed on private land...

...Local political struggles routinely pit profit-seeking developers against homeowners who want as few neighbors as possible...

...The topic is as important for politics as for economics, because land use is among the few fields of activity in which local governments have retained autonomy in the face of the nationalization of politics and the internationalization of the economy...

...The case for single-payer health care, after all, was not only a matter of justice...

...The theory was that these organizations, competing for patients who pay a fixed annual fee for all their health care, would have an incentive to provide good care efficiently...

...Like land development, markets for medical services are inextricably linked to state action and cannot be understood without examining the political as well as the economic interactions among consumers, providers, and state administration...

...The developer, in this system, must weigh the potential profits from a new project against the costs of overcoming frictional resistance and the risk of failure to do so...

...It will not do, if it ever did, to create a new bureaucracy in response to every problem...

...Incompatibility between the nature of medical care and the market form of organization lies at the root of the inflation in health care costs that is now our major problem in public finance...

...Legal doctrines providing that governments may not arbitrarily interfere with private property but may only pass rules of general application promote adjudication by unelected administrative boards and by the courts...

...In reality, of course, local land-use controls are more an arena for political conflict than a system of rational optimization...

...American liberals have too often shared the unexamined conservative assumption that markets are natural and immutable...

...The plans, adopted by local legislative bodies with advice from professionals, ostensibly are aimed at ensuring that development is coordinated so as to yield socially optimal results...

...In reality, these organizations have acted like the Soviet shoe factories that found that quotas for shoe production could be met most efficiently by producing only small sizes...

...The shift of power over the years from the top downward into the bureaucratic apparatus was a key element in the system's stagnation and eventual collapse...

...In the same way, the environmental devastation of Eastern Europe cannot be ascribed to central control in the abstract...