An Imperfect Model

...That, however, is the direction in which they are moving today, and the results are not salutary for workers...

...it includes a detailed account of the interplay between markets and regulatory structures, both historical and current...

...Certainly the peculiar blend of market and nonmarket forces that currently determines the allocation of healthcare resources in the U.S...

...As Kuttner points out, the modern American supermarket is an example par excellence of market capitalism...

...And it all happens with a minimal role for government...

...In the aftermath of the Great Depression and World War II, America built an economy that combined markets with a regulatory apparatus and a constructive role for government...

...Is it, he asks, really appropriate or really efficient to extend pure market principles to labor, to healthcare, to the forces that govern technology and growth...

...This need not be the case, Kuttner argues...

...To this is wedded the "rationality" postulate, which says that all these agents are rational, calculating individuals who continuously balance gain against cost...

...Cash-driven elections have rendered the ordinary voter cynical about the democratic process...

...One of the grave deficiencies in their training is the neglect of both economic history and the institutions through which the economy functions...

...There can be no question that markets work superbly in many areas of the modern capitalist economy...

...Available policy options a commitment to full employment, the strengthening of unions, the use of wage subsidies, expanded education and training could bring about greater efficiency and greater equality in labor markets...

...Rarely if ever are any of these assumptions realized...

...Worse still, as labor markets have increasingly become "laissez-faire markets," income and wage inequality has grown alarmingly...

...Everything for Sale divides itself into three broad sections plus the author's conclusion...

...In his chapter on economic growth, for example, Kuttner ably guides the reader through all the theoretical intricacies, but then examines the historical record to show how government has always had a major role in fostering growth...

...Though the author has no grand scheme for achieving this, a reasonable first step might be to take the money out of politics...

...There is, first, the "maximization" postulate, which asserts that consumers try to maximize their satisfaction, producers their profits, and workers their incomes...

...But the problem with this idyllic picture is that it depends upon some very special assumptions...

...Labor markets have long existed, of course, but seldom do they resemble the "spot" markets of pure economic theory...

...they bring together entrepreneurs and investors...

...But given the current climate, they are unlikely to be exercised...

...By the Reagan era, the impulse to exalt the market and denigrate government had come to seem almost universal...

...Two additional principles are critical for the textbook model...

...Kuttner, a polished and knowledgeable economic journalist, does a thorough job of placing the operation of markets in its historical and institutional context...

...There is more downsizing, more outsourcing, more dependence upon temporary and contract employment, and a general weakening of the implicit social contract between labor and management...

...they encourage and reward innovation...

...In all these areas, the pressure toward "marketization" has become almost irresistible, even though the social gains to be expected are dubious...

...In a mixed economy, Kuttner insists, the state must intervene to protect citizens from a variety of ills that unrestrained competition would produce air and water pollution, the manufacture of dangerous products, unsafe workplaces...

...Turning to healthcare, Kuttner submits it as a prime example of a domain where the Theory of the Second Best might be profitably applied...

...Finally, Kuttner calls for a new synthesis of markets and politics that would supersede their present uneasy coexistence...

...They offer consumers broad choices...

...A fundamental problem with the conventional outlook, according to Kuttner, is its neglect of the General Theory of the Second Best...

...He points out that orthodox economics never came to terms with Joseph Schumpeter's argument that the self-regulating market enshrined by neoclassical economics would rule out the very innovation that serves as the "sparkplug of capitalism...

...Nobody has the time or knowledge to optimize every decision...

...Ironically, while doctors have been worrying about losing control over strictly medical decisions to the Federal government, that control has been slipping into the hands of nongovernmental entities like the foregoing...

...Fortified by this critique of the theoretical framework, Kuttner takes on the issue of whether everything ought to be for sale...

...Kuttner's case for regulation is based on more than analytical reasoning...

...Kuttner rightly notes that the Achilles' heel of conventional economics is the rationality postulate...

...He himself plumps for a single-payer, Canadian-style system, one in which healthcare costs would be socialized but the best features of the traditional fee-for-service approach would be retained...

...is a dysfunctional one...

...Research on the frontiers of economics and psychology has shown that all human decision-making involves a blend of rationality, irrationality, moral judgments, and plain ignorance a long chalk from the maximizing automaton beloved by economists...

...This is followed by a close analysis of real-world markets that fail to conform to the simple axioms...

...What is miraculous about the textbook model of the market is that millions upon millions of individual decisions translate into a meaningful whole in which a maximum of the goods and services that people actually want are produced...

...The obsession with market solutions has driven us toward increasing dependence on private insurance...

...The payment process is split among far too many insurers, and medical decisions end up being made not by the patient and his physician, but by large insurance companies, for-profit hospital chains and HMOs...

...In politics, as in the rest of society, too much is for sale...

...A better outcome ("second best" to the unattainable ideal) may result from a combination of market imperfections and regulation the sort of situation that is probably characteristic of most markets in the world today...

...This is a matter that mainstream economists largely ignore, mesmerized as they are by an idealized conception of the unregulated market...

...and they ruthlessly purge the economy of failures...

...If the laissez-faire momentum is to be reversed...

...To dampen the fervor for unfettered competition, he details the baleful consequences of the airline deregulations of the 1970s and '80s...

...Confidence in government must be restored, simply because it is through government that society creates the institutions that check the market's excesses...

...Kuttner suggests, politics must be the instrument...

...The time for real reform may be ripe, but it remains to be seen whether either President Clinton or the Republican-led Congress will meet the challenge...

...Kuttner gives ample reason to doubt whether private companies can make a profit insuring against health risks unless they screen out those most in need of coverage...

...It is also taken for granted that all participants have perfect mobility, that they are free to move their labor, their capital, their consumption preferences elsewhere if their current circumstances are not optimal...

...The third section deals with the market's role in technological advance and economic growth...

...Developed by Richard Lipsey and Kelvin Lancaster in 1956, this theory holds that whenever market behavior deviates significanity from the pure model, attempts to make it more like the model will not necessarily improve matters...

...Everything/or Sale abounds with sharp insights and first-rate economic analyses...

...Reviewed by Wallace C. Peterson George Holmes Professor of Economics Emeritus, University of Nebraska-Lincoln Robert Kuttner has written an interesting, challenging and well-documented book that explores the vital question of what markets can and should do—and what they cannot and should not do in our complex mixed economy...

...they promote efficiency...

...Consumers are supposed to have perfect information, knowing exactly what they want without the influence of advertising...

...Yet regulation in these areas is relatively recent, and there are powerful interests that would like to see it dismantled...

...What we have is a hybrid system in which the well-insured receive adequate (albeit technology-intensive and costly) medical care, while a large pool of uninsured people receive little or no care...

...In the first part, Kuttner explores the merits and accomplishments of actual markets that resemble the economist's standard model, and indicates areas where market enthusiasts push the model too far...

...Competition, too, is assumed to be "perfect," with so many buyers and sellers that no single agent can influence prices...

...The mix was successful enough, but it has been under assault since the early 1970s...

...Through Adam Smith's "invisible hand," the pursuit of self-interest advances the general good...

...By employing sophisticated mathematics, economics drapes itself in the mantle of science overlooking the fact that the real hallmark of a science is the empirical testing of its predictions...

...Nevertheless, this has not prevented economists from using them to construct increasingly esoteric and mathematical models that not only purport to explain how the real world works, but also imply that markets almost invariably work best...

...Thus his book will be immensely rewarding not only for the general reader, but also for professional economists willing to concede that a noneconomist can have something valuable to say about their subject...

...He also observes that the most dynamic industries of this century electric power, telecommunications, aviation, radio, television, and information technology—have been those most subject to restraints: on entry, exit, price, demand, supply, and the overall terms of competition...