Private Property Anarchism

Central Planning vs. Medical Knowledge

2010-09-02T19:14:00.003-05:00

Why Medicare’s Latest Idea, Accountable Care Organizations, Will Not Work

Accountable Care Organizations (ACO’s) are Medicare partnerships set to start in January 2012 in which relatively large number of local physicians and other local providers of healthcare services will team with local hospitals and Medicare and will attempt to improve quality of care and reduce costs. The model calls for incentive payments by Medicare based on numeric indicators on quality, clinical processes, patient satisfaction, utilization, costs and outcomes. Medicare would assign a minimum of 5,000 local patients to an ACO and will track these indicators over time. Medicare will develop a baseline consisting of the prior 3 years’ cost information of those patients assigned to an ACO and will adjust it for risk, that is, how sick its patients are. Medicare will also develop a cost reduction target for the population. An ACO’s performance will then be compared to cost reduction targets and if the yearly per-capita beneficiary costs are below the target specified by Medicare, then the ACO will be entitled to a share of the savings which will be distributed to the members of the ACO.

ACO’s are a response to the regional variations in Medicare expenditures per enrollee documented by the Dartmouth Atlas group, variations that range from $6,000 (Dubuque, Iowa) to $17,000 (Miami, Florida). Dartmouth Atlas finds that these variations in expenditures are caused by differences in the amount of care given to the population and that the amount of care depends on the supply of medical services available in a particular region. These variations are supported by a Medicare payment system that keeps the supply of medical services fully employed regardless of their capital intensity or their cost to Medicare. The higher the proportion of hospital beds and specialists in a region, the higher the number of hospital admissions and referrals to specialists and the higher the Medicare total payments in a region. Simply put, the higher the supply, the higher the demand.

The hypothesis behind ACO’s is that if spending could be safely reduced to the level of the low spending regions, overall savings for the US healthcare system would be in the order of 30%, and that since according to the Dartmouth Atlas data large clinically integrated health systems are able to provide care at lower costs, then ACO’s that emulate these large healthcare systems could serve as the vehicle for provider integration in regions that lack such large scale integration and, if the proper financial incentives from Medicare payment systems are in place, ACO’s will form and will achieve those savings.

The policy implications of ACO’s are clear: to reduce costs, Medicare will need large organizations of physicians and hospitals with more primary care physicians, fewer specialists, fewer hospitals, fewer hospital beds, fewer capital intensive diagnostic and treatment technologies, primary care physicians who do not refer to specialists and finally, specialists who do not use hospitals or capital intensive equipment.

But Medicare’s and Dartmouth Atlas’ logic is based two intellectual mistakes. Their first mistake is to assume that Medicare’s current payment methods (fee for service) reinforce an already poorly coordinated and expensive medical care and that supply causes demand. The cause and effect relation moves exactly in the opposite direction: we have poorly coordinated and expensive medical care because Medicare’s payment method interferes with the formation of free market prices and we have higher supply of services because under the current sytem, we have an unlimited unchecked demand for services. As Ludwig von Mises pointed out, without prices economic calculation is impossible so managers and entrepreneurs are unable to allocate capital, labor and supplies to the highest valued use and without the constraints on cost to themselves, consumers of healthcare face no limit to their demand. We have explored this argument here.

Their second intellectual mistake is to assume that the healthcare system can be made more efficient by encouraging and forcing integration. This mistake is caused by Medicare's failure to understand how complex societies transmit knowledge and information. F.A. Hayek answered this question in 1945 in his essay The Use of Knowledge in Society. Sociologist Charles Bosk supports Hayek’s answer in his classic 1974 field study of residency medical education titled Forgive and Remember. The rest of this article follows the logic behind these two works and applies them to the healthcare reform debate.

The knowledge necessary to improve coordination and reduce costs in our healthcare system is never and can never be concentrated in a central planning organ, be it at the national level with Medicare, or at the local level, with an ACO. To the contrary, medical knowledge is always dispersed in incomplete and contradictory form scattered among million of patients and thousands of health care providers. Medical knowledge is only made present in the individual interaction between a particular patient and a particular health care provider in a particular physical space and time. The problem that Medicare is trying to solve is not what is the best way to allocate scarce healthcare resources in general. Medicare’s problem is infinitely more complex; Medicare is attempting to find out how to allocate scarce health resources when only the individual patient and his physician know the relative importance that those scarce resources have when compared to other alternatives.

If Medicare could concentrate all the knowledge which is initially dispersed and then convey that knowledge back to individual patients and their physicians so they can make the right decisions, then ACO’s (and central planning indeed) could be successful. But this depends on the type of knowledge that needs to be communicated. If what Medicare is communicating is scientific knowledge, perhaps a body of experts could be assembled to decide on the right diagnostic and treatment protocols that ought to be used--though Medicare would then have to address the obvious questions of who selects the experts, what criteria is to be used for that selection and how those protocols will be enforced across space and time. Indeed Congress has already allocated $10 billion to Medicare to establish a center for innovation in January of 2011 charged with develop innovative models to slow growth and improve quality.

But Hayek points out that scientific knowledge, is not comprehensive knowledge. There is knowledge that is unorganized rather than scientific, particular rather than general, bound by time rather than timeless and bound by location and circumstance rather than universal. This is the knowledge that a patient has about his specific symptoms, his history, his physical condition, his emotional state, his subjective level of pain, his spiritual inclination, etc., that can only be voluntarily disclosed if it is to be used by his physician to diagnose and treat the condition that is causing the symptoms. It is also the knowledge that a hospital or medical practice manager has: knowledge about relative surplus, scarcity and quality of supplies, weather or other conditions that may interrupt the flow supplies, labor and patients, best locations to rent physician offices or build hospitals, how and when to consolidate or expand services or nursing units within a hospital, how to cut costs in this particular department at this particular time without sacrificing quality, when to improve quality even if costs increase, key stakeholder analysis, accountability systems, etc.

This type of practical knowledge is also characteristic of the clinical knowledge that an experienced physician has. In his field study of medical education Forgive and Remember, sociologist Charles Bosk follows a team of medical residents and attending physicians over the course of 18 months to observe how medical knowledge is transmitted. Specifically, he concentrates on the nature and types of medical errors. He points out that a misunderstanding about two types of medical errors (a reasonable treatment option that is later proven wrong versus a treatment option that is an indefensible mistake) and how physicians make the distinction between the two, leads to incorrect policy recommendations about how the medical profession ought to be controlled. He argues that medical errors are an indeterminate category, similar to beauty or mercy (p.24). This indeterminateness is caused by the dual nature of medical knowledge itself: on the one hand, there is scientific knowledge (or “general knowledge” in Hayek’s terminology) and on the other, there is clinical expertise (or “local knowledge” in both Hayek’s and Bosk’s terminology). Bosk found that when physicians make clinical decisions, “arguments based on clinical expertise override those based on scientific evidence” (p.85). Local medical knowledge, therefore, trumps general knowledge, exactly the same conclusion that Hayek reaches.

Residency programs for medical students are apprenticeships in which an experienced attending physician nurtures and develops through a series of almost choreographed rituals, humor, unwritten rules, stereotypes, hierarchical structure, tension, drama, survival-of-the-fittest character, public display of student’s and attanding’s mistakes and accomplishments, compassion, self-deprecation, team effort, individualism, camaraderie, horror stories, etc., in the inexperienced resident the practical judgment to know when to follow scientific knowledge and when to follow clinical experience. This is the most critical element of medical education. Residents are expected to study and know the general rules. Attending physicians are expected to teach residents to recognize the exceptions to those general rules. That clinical acumen or clinical eye characteristic of an experienced attending physician, his clinical expertise, “is a charismatic possession, a gift of grace; its exact nature is a mystery“ (p.92). Medical education has evolved over hundreds of years and is structured today as a way for medical residents to appreciate that mystery.

Bosk points out that the assumption by managed care, and I would add Medicare, Dartmouth Atlas and all medical central planners, that the healthcare system can be made more efficient through centralized decision making far from the bedside clashes with the very system that clinicians use to grapple with medical errors, understand their cause and implement remedies, and teach future physicians, all part of a process that is “an extreme example of local knowledge” (Bosk’s own terminology in p. xxiii). Bosk concludes that medical “errors are not events that can be counted. Their existence needs to be debated; the discourse over precisely what is and is not an error is necessary to the formation of a sense of professional responsibility.”

The patient’s knowledge about his condition, the manager’s knowledge about the local conditions of the market, the physician’s clinical knowledge about exceptions to the rule are all knowledge that cannot be counted, aggregated and expressed in statistical format. It cannot be conveyed to Medicare planners. Aggregation destroys the minor differences that are the “bread and butter” of the day to day actions of physicians and healthcare managers at the local level. And even if it were possible to aggregate, this knowledge could not be disaggregated and transmitted back to individual patients and providers of care in time to have any useful meaning to guide action at the local level, especially given the rapid rate with which change at a local level takes place.

Bosk doesn’t offer any solutions to the quandary facing healthcare central planners, but his study reveals what is the result of centuries of development in the medical education field: an apprenticeship environment at the local level can best impart the practical, local and non-theoretical clinical knowledge necessary for medical students to become effective clinicians. This supports Hayek’s insight that only by decentralizing can coordination be improved.

The challenge faced by Medicare is how to allow decentralization and at the same time impart the additional knowledge to local patients, local physicians and local hospitals that will allow them to make decisions in a way that the overall objectives of Medicare can be met. In this regard, Medicare faces not just a difficult problem, but an impossible task. Almost anything that happens in the world can and does have an effect on the decisions made at the local level.

The paradox of simultaneously having to decentralize and coordinate in order to achieve common general objectives is solved by the market price system. Hayek states that when free market prices are allowed to function, they coordinate the separate actions of different people in the same way that an individual’s subjective values assist him in coordinating the parts of his own plan, without having to know all the details of the problem to be solved or having to develop all the ramifications of each option. He concludes: “The mere fact that there is one price for any commodity...brings about the solution which might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

The price system communicates information critical to achieving coordination at the local level and achieves general objectives as if an omniscient central planner instantaneously and continuously provided guidance to everyone. In fact, Hayek states, the marked does it so efficiently that its participants need to know nothing about the causes and ramifications of events affecting a particular local process in order to react quickly and through trial and error approximate the correct action that a central planner would recommend if he were omniscient.

If Medicare aims to have local patients, physicians and hospitals to reduce costs, improve quality and adapt quickly to local changes, it would seem that the best and indeed only way to make that happen is to allow local providers who are most familiar with those local conditions, local resources and local changes to make those adaptations. Without a market and its price system, however, this is impossible to achieve. Centralization and price controls can only slow down adaptation, reduce coordination, increase misallocation of capital, supplies, and labor and ultimately reduce quality and increase costs.

__________

¹ Israel Kirzner’s Competition and Entrepreneurship, Chapter 6 Competition, Welfare and Coordination, helps clarify and augments Hayek’s argument.

Medicare can’t play market

2010-06-27T18:47:00.004-05:00

The Journal of the American Medical Association (JAMA) reported June 24, 2010 that Medicare’s program requiring hospitals to reach certain numeric goals that measure the Surgical Care Improvement Process (SCIP) in care of surgery patients do not result in better outcomes:

“Despite this evidence, hospital-level performance on individualSCIP measures is publicly reported "to assist patients in selectingcenters of excellence" for receipt of their surgical care.This publicized use implies that reported adherence on thesemeasures is directly related to improved outcomes. Our findingsare unable to support this assertion.”

This is a significant blow to Medicare’s “Value-Based Purchasing.” This initiative is part of a trend that the tax-supported payor program for seniors started more than a decade ago to mimic the free market. The method that has been selected attempts to derive numeric scores in three quality domains: process of care, patient satisfaction and outcomes. From these scores, Medicare will apply a payment formula that will redistribute a pool of funds created by a 2% withholding of hospital Medicare payments. This is designed to provide the necessary financial incentives for hospitals to comply with the program. Hospitals with scores in the top quartile will receive 100% of their contributions into the pool. Hospitals in the bottom quartile will not receive any of their contributions back, and the middle 50% will be paid according to a formula that goes from 100% to 0%. These payment formulas will be phased-in from 2013 to 2017. In an era in which Moody’s “A” rated hospitals have operating margins of 2.2% and Medicare represents over half of that margin, giving up 2% of Medicare payments is the difference between keeping the hospital open or closing it.

The study from JAMA looked at a subset of measures for the process of care in surgery known as Surgical Care Improvement Project (SCIP). This project was started by Centers for Medicare and Medicaid Services in 2002 to decrease complications and mortality associated with postoperative care in hospitals. Measures include antibiotics given one hour before incision, clipping rather than shaving hair on the surgical site, keeping blood sugar controlled between certain limits, treatment to prevent blood clots, etc., but there are other non-surgical process measures such as pneumonia patients receiving pneumococcal vaccination. Satisfaction measures include doctors and nurses always communicate well, rooms were always kept clean and quiet at night, etc. Outcome measures include mortality and re-admission rates. Hospitals started reporting in 2004 on 10 measures. Currently they must report on 46 measures. This number is scheduled to grow to 55 in October 2010 and to 90 by 2012.

Medicare’s hypothesis for Value Based Purchasing seems straight forward: if hospitals attain these goals in process, satisfaction, and outcomes, the quality of patient care will improve, and costly interventions to correct negative medical outcomes, such as additional surgeries, antibiotics, vascular procedures, additional days in the hospital, etc., will be avoided. Moreover, if hospital performance in reaching these goals is reported to the public, consumers will chose hospitals with better scores (and lower costs), hence overall healthcare costs for the program will drop.

Using the Misesian critique of socialist calculation we have argued in prior articles (The Health Czar Can’t Calculate” and “Why Obamacare Can’t Work”) that it is impossible for Medicare to give any coordinating content to its mandates, that it is also impossible for healthcare agents to rationally allocate their scarce labor and capital resources under Medicare’s cost-based payment methods and that therefore, at best, Medicare will not be able to reign-in healthcare costs.

The empirical results of this JAMA study point out that even if the socialist calculation problem did not exist, Medicare cannot know with certainty which hospitals offer high quality care and which don’t. First, in reviewing other studies, the authors of the JAMA article found weak or no statistical significance between adherence to individual process of care measures and improvements in patient outcomes. Second, they argue that without better cause and effect relationships between process and outcomes, it is difficult to justify the massive investment in time and resources needed to track all these measures. Third, complications stemming from hospital care are influenced by a myriad of factors that are independent from the process of care measures. Fourth, public reporting of performance in process of care measures which compare hospitals do not infer quality differences between hospitals. And finally, that implementing financial incentives do not improve hospital quality.

These empirical findings by JAMA are fully supported by the Misesian critique of the use of the method proper to the natural sciences to the social sciences. One could make the argument that medicine can use the method of the natural sciences effectively. However, medicine is as much science as it is art. Writing a progress note in a medical record, for example, one that successfully communicates to other clinicians the unique medical history, symptoms, diagnosis and treatment for a patient cannot be fully encapsulated in a statistical function derived from the reaction of the same types of patients in clinical trials or in the experience of the physician. But even granting such a concession, when the method of the natural sciences is applied beyond the narrow confines of very specific predictions about patients and their care to the world of hospital management in which social relationships between thousands of human beings such as patients, care-givers, support staff, management, bond-holders, philanthropists, employers, third party payors, suppliers and competitors influence a myriad of cause and effect relationships that directly and indirectly affect nature of the care given, then the natural sciences method cannot make statistically significant predictions about that care. This is because complex relationships between individuals with their own uniqueness and freedom influence the outcomes that are being measured, and, more importantly, the actions of these individuals many times provoke the very events that Medicare is trying to prevent.

If the cause and effect relationship between Medicare’s proposed goals for hospitals and overall quality is statistically weak or non-existent, then their connection to cost reduction is also weak or non-existent. Medicare’s Value-Based Purchasing initiatives will not cause a reduction in costs. This, in conjunction with the socialist calculation problem, will continue to confuse Medicare’s central planners as they attempt to encourage patients and healthcare providers to simulate the results of competition.

A Critique of the Medicare Payment Advisory Commission

2008-10-10T22:50:00.006-05:00

The Medicare Payment Advisory Commission released its second annual report to Congress in June 2008. Titled “Reforming the Delivery System”1, the report outlines the change in direction that the Medicare program is likely to take in the coming years. The Commission recognizes that without change, “the Medicare program is fiscally unsustainable over the long run”2 and it believes that under the current Fee For Service (FFS) payment method, in which Medicare reimburses hospitals and physicians for individual units of service, incentives for reform under are limited for two reasons. One, paying for individual units results in a strong incentive to providers to increase volume of services, and two, separate physician fee schedule and hospital prospective payment systems discourage coordination between physicians and hospitals that might result in efficiencies or better outcomes. 3 As a result, the Commission makes a series of recommendations to move Medicare away from FFS payment method toward one that promotes better coordination and accountability.

While these goals are laudable, their fundamental error is that the Commission’s assessment fails to understand the cause of the symptoms it attempts to diagnose and treat. The tell-tale sign of this methodological mistake is encapsulated in one of their reform ideas: the creation of an independent entity to produce information about the relative value of the services for which Medicare pays. By “value”, the Commission means “the clinical effectiveness of a healthcare service compared to its alternatives,”4 which will include cost effectiveness. The report states that while “cost effectiveness is not the primary mission, the Commission does not rule it out,”5 obviously because it recognizes that questions of value cannot be divorced from questions of economic calculation.

However, under Medicare’s central planning authority any rational economic calculation about the relative value of different health services is practically and theoretically impossible. This is the root cause of the inevitable long term collapse of the Medicare program and as we shall explore later the root cause of the inevitable collapse of our entire health care system. Any health care system resulting from central planning is not just of higher cost, lower quality, reduced innovation, uncoordinated, inefficient and ineffective, but literally and truly impossible. Austrian economist Ludwig von Mises in his 1920 treatise “Economic Calculation in the Socialist Commonwealth” developed this fundamental insight about the nature of all central planning.6 I rely heavily on his analysis of the impossibility of economic calculation under socialism to understand the inherent problems in the healthcare system created by the Federal government under the auspices of Medicare.

From a practical perspective, one can imagine a central planner judging the value of health care goods which require very simple production process, such as picking and consuming an orange from a tree in order to replenish the body of needed antioxidants that may aid in the prevention of certain cancers. One can also imagine this central planner valuing goods that are required in a slightly longer production process such as using lumber, a saw, a hammer and nails, to build a ladder to be used to climb a tree to pick fruit more efficiently. This is because in these simple examples, the planner can measure income and expense across the relatively short period of time it takes to build a ladder and pick fruit. But matters get very complicated very quickly when the central planner needs to decide on the level of reimbursement for a chemotherapy agent that took a pharmaceutical company years and millions of dollars to discover, test and manufacture, for the oncologist who supervises the delivery of the drug and who invested thousands of dollars and years of his life to understand the cancer disease process and for the hospital that invested millions of dollars and decades to build the infrastructure within which to deliver the drug.

This type of valuation is quantitatively more complicated because chemotherapy agents, physicians’ intellectual development and hospitals require very long and wide production processes across time and geography and complex interconnections between people, producers, quality, revenue and cost. In addition, to this one particular health product at one particular point in time and geography, the Medicare planner must consider hundreds of thousands of other health care goods and services, tens of thousands of hospitals, pharmacies, nursing homes, surgery centers, diagnostic centers, laboratories, home health agencies, hospices, long term acute care hospitals, ambulances, and millions of patients physicians, nurses, therapists and clinicians, across time and space. The central planner must therefore consider a practically infinite number of permutations in order to correctly allocate half of the healthcare dollar spent in the US.

Some may argue that the advent of the information age will resolve this practical calculation problem. But even if the Medicare planner possessed the most advanced computer information systems, it is only logical to assume that hospitals, physicians and producers of healthcare goods and services will possess similar computer systems as aides in the management their own internal operations and that hence, together, they would be capable of generating more information than the Medicare planning computer could absorb and process meaningfully. So paradoxically, information technology actually makes the economic calculation problem for Medicare more difficult to resolve.7

The Medicare planner must also consider two additional exacerbating factors.8 The first one is that like all goods, healthcare resources by their very nature are to a greater or lesser degree substitutable for one another. This is the phenomenon that the Commission is attempting to resolve by creating another commission to study the relative value of different health care services. For some types of breast cancers, for example, chemotherapy, radiation therapy and surgery may be substituted or complemented with one another. The challenge for the Medicare planner is to discover and approximate the myriad of natural substitutability of all healthcare goods and services in accordance with the exchange relations that an unhampered healthcare market economy would take place automatically and instantaneously.9

The second factor exacerbating the calculation problem is that since time is a scarce resource, capital can be accumulated and invested in order to lengthen any process of production and improve the efficiencies and quality of any healthcare good or service. This further multiplies the permutations required to evaluate alternative plans for the allocation of capital for the production of not only health care goods and services that Medicare patients consume, but also of capital required to manufacture the goods and services used by producers to fabricate the goods and services that hospitals and physicians purchase. For example, hospitals may decide between investing their capital in robotics for pharmacy or the operating room in order to improve the productivity and accuracy of pharmacists and surgeons or they may hire additional pharmacists or more experienced surgeons, or varying combinations between all or none of the above. Simultaneously, the manufacturer of robots would need to decide to invest capital to develop either pharmacy, operating room, radiation therapy or automobile robots and varying combinations between all or none of the above, and so on and so forth up the production chain of producers of software, research, education, parts, raw materials, financial services, etc., etc. So another challenge for the Medicare planner is to discover and approximate the natural substitutability of all alternative production chain possibilities that an unhampered healthcare market economy would discover automatically and instantaneously.

The infinite complexity of actual and potential relationships among producers, suppliers, providers and patients require precise calculations of income, expense, assets and liabilities across time in terms of a medium of exchange, i.e., money. Monetary calculation under conditions of private property and freedom of exchange, allows all consumers and all producers in very complex and long production processes to simultaneously solve the economic calculation problem detailed above by what Mises calls an “intellectual division of labor.” 10 This process is twofold. On the one hand, each and every consumer makes monetary bids for goods and services based on his individual subjective valuation resulting in objective money exchange ratios for goods and services (i.e., market prices for goods and services). On the other hand, every producer seeking to engage in production and seeking to maximize profits, bids against one another for the factors of production (labor and materials) resulting in objective exchange ratios for labor and materials (i.e., wages and prices for materials). In this way, Mises points out, not only end products ready for consumption but all intermediate goods used in the production of those end products “receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and social needs.”11

When prices in the health care market are not the result of unhampered exchanges between economic actors but are mandated by a central planning agent, the capital structure of health delivery systems is distorted. This is because the prices of goods and services set by Medicare create different profit expectations in the minds of hospitals, physicians and the rest of the producers of healthcare goods and services up and down the various chains of production than the prices that would have been created by the free market. For example for years Medicare has handsomely rewarded hospitals and physicians who set up ambulatory radiation oncology programs. This preferential pricing not only encourages the proliferation of radiation centers and the associated stimulation of demand by patients, but also affects each and every intermediate step in the entire production chain necessary to build and operate a radiation center. This includes, for example, the production, marketing and distribution of linear accelerators, the programming of software to design treatment plans and control the accelerator, the production of CT scanners that feed patient’s anatomical information into the treatment planning and accelerator navigation systems, education facilities to train radiation technologists, physicians, physicists and administrators to diagnose, plan, treat and manage the accelerator, the production of lead, aluminum, steel, plastics and other raw materials needed to build and produce all of the physical components of accelerators, facilities and supplies needed, etc., etc. The length and scope of this production process alone and hence the capital structure required to bring about thousands of radiation treatment centers across the nation is as deep as it is wide.

All of these intermediate industries are interrelated using hundreds of thousands pricing signals. By making pricing decisions on the reimbursement of radiation therapy services based on criteria other than the subjective valuation of patients and producers, the Medicare planner affects all the pricing signals throughout the production process of each intermediate industry; however, the central planner, by definition, will never comprehend or have the means to comprehend and test how his pricing decisions cause changes in the structure of health care production, because the only rational way to test these cause and effect relationships is via the monetary calculation made possible by exchanges between patients, providers and other producers of healthcare goods and services in a free market.

At the outset of the Medicare program, its central planners were able to set their prices as parasites of the then existing competitive private health care price structure, just like their Soviet Union counterparts unable to resolve the economic calculation problem were forced to copy and use the price structure of Western economies to direct Soviet production processes and subsist for 80 years, albeit at inefficient and meager levels. This strategy was recommended by the Medicare Payment Advisory Commission in it’s first Report to Congress in March of 1999 which argued that Medicare’s primary payment system objective is “to establish payment rates that approximate the competitive prices that would prevail in the long run in local health care markets.”12

But as the proportion of Medicare expenditures continue to grow as a result subsidization and unintended stimulation of demand, as additional Medicare programs are brought on line, such as prescription coverage, as the proportion of Medicare eligible population increases relative to the rest of the population and as additional government programs such as Medicaid grow faster than the private sector, the percentage of the health care economy under the control of the government expand and central planners crowd out the fewer pricing signals produced by a diminishing private sector. If to this one adds the already existing inadequacies of the pricing signals produced by the private health sector, such as the distortions produced by a tax policy that encourages employer provided health insurance arrangements, the mixing of both uncontrolled risk (e.g., family history) as well as controlled risk (e.g., eating habits) in health insurance risk pools, is it any wonder that health costs are out of control and that unsubsidized members of society have been priced out of the market for health services?

In addition to facing the practical calculation problem outlined above, the labyrinthine payment methods created by Medicare totally misunderstand the theoretical nature of prices and hence do not recognize the theoretical impossibility of its attempt. Unlike the weather forecaster who faces a technical problem that can be ameliorated by the use of better satellites and faster supercomputers, the Medicare planner simply cannot determine the market prices for the services that it reimburses because by definition health care prices can only be arrived by the free and unencumbered interaction between patients and providers.

There are two reasons why it is theoretically impossible for the Medicare planner to arrive at a rational pricing structure for healthcare. The first, prices of goods and services are not determined by their costs of production. Prices are determined by the instantaneous valuations made by consumers bidding for goods and services. By a process of imputation that flows from the consumer to the producer, prices of goods and services impute value to the factors of production necessary to make the goods and service that consumers demand. This imputation of value occurs when producers and entrepreneurs bid for the factors of production (labor and materials) in response to expected future profits and which sets wages for labor and prices of materials.

For more than two decades now, Medicare planners have come up with alternative valuation methods that unsuccessfully attempt to arrive at a rational price structure for health services. Despite the Commission’s assertion that cost-based payment methods (in which reimbursement is determined by allowable costs supplied by providers) are being phased out because “they are complex, they result in unpredictable payments and spending for providers and Medicare, and they weaken provider’s incentives for efficiency”13 and that they are being substituted for prospective payment methods (in which an initial operating and capital payment base rate is adjusted by wage indexes, case mix, medical education costs, charity burden, short or long lengths of stay, etc.), payment rates are still determined by cost information. This is because the initial operating and capital payment base rate that prospective systems use is determined by “the operating and capital costs that efficient facilities would be expected to incur in furnishing covered” health services.14 “Operating payments cover labor and supply costs; capital payments cover costs for depreciation, interest, rent and property-related insurance and taxes.” 15 Despite the fact that this initial base rate is later modified by wage rates, geographic differences, case mix, etc., the initial rate is still cost based. Again, the first reason why it is theoretically impossible for Medicare to rationally set prices is that prices determine production costs and not the other way around. When the Medicare planner tries to use cost information to arrive at a price, he has the economic cause and effect relationship backwards.

The second reason is that prices in a market economy are continually, instantaneously and simultaneously being created, destroyed and recreated by the individual subjective valuations of consumers and producers facing the passage of time and hence changing expectations, economic conditions, wants, needs, technological advancements, etc. This information about valuations is not created until after consumers and producers place their respective bids in the intellectual division of labor process outlined above, so it is impossible to transmit it before it is created. Before bids are made, all you have is a universe of possibility in the minds of each economic participant that do not constitute information. But once bids take place and information created, transmitted to the central planner, processed and returned to the market place in its original or distorted form, it is old and useless information that cannot have rational guiding content. Moreover, if the information returned by the planner is coercive in nature, bids do not take place and future pricing information cannot be created.

As a result, all the Medicare planner does, to use Mises’ phrase, is grope in the dark. The Medicare planner may know exactly what final health care goods and services are needed to meet the needs of Medicare patients. Indeed, in the Commission’s own words, “Medicare’s primary goal is to ensure that its elderly and disabled beneficiaries have access to medically necessary acute care of high quality.” 16 But as Mises points out, this is only one of two simultaneous equations that are needed to resolve the economic calculation problem. The second equation is the valuation of the means of production to ensure that those needed goods and services are produced. Without market derived pricing signals, hospitals, physicians and producers of healthcare goods and services up and down the production structure (and the Medicare planner) are all left without the bearings of economic calculation. The Commission’s greatest concern, therefore, should not be that “the Medicare program is fiscally unsustainable over the long run,” as worrisome as that is, but that our entire healthcare system, including the capital structure needed to support a wide array of lengthy production processes, is unsustainable over the long run, being left, to quote Mises, “floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation.” 17

It is highly unlikely that the arguments advanced here will slow the accelerated movement toward the complete socialization of the healthcare delivery system in the US. Most supporters of socialized medicine do so for aesthetic, moral, political or religious reasons. But at a minimum, it is my hope that the above ideas will be a warning to those who expect a rational system of economic calculation that will guide consumers and producers of healthcare services to come out of command and control Medicare reimbursement systems.

Ludwig von Mises warned Marxists economists in the 1920’s that economic calculation in a command and control economy was literally impossible. In the end, the collapse of the Soviet Union and the rest of the Eastern Block caught unaware the great majority of Western economists. It is not just that these economists were unable to play their expected role and spare humanity of all of the grave errors committed by the planned economies in the East, but that on the contrary, economists encouraged the very same policies that caused untold misery and human suffering in the East. Sadly, Western economists instead of openly manifesting profound regret for their failure and instead of rethinking the theoretical underpinnings of their science, to this day continue to study their science and make policy recommendations as if nothing had happened.

In blindly following the advice of health economists who practice within a bankrupt theoretical framework and in suggesting that Medicare central planners can come up with rational pricing and payment methods for health services, the Medicare Payment Advisory Commission makes exactly the same intellectual error that Soviet planners made 90 years ago. One can only qualify as overbearing arrogance the Commission’s presumption: that Medicare central planners in the US are smarter than their Soviet counterparts.

1 Medicare Payment Advisory Commission, “Report to Congress Reforming the Delivery System, June 2008” http://www.medpac.gov/documents/Jun08_EntireReport.pdf

2 idem, p. xi

3 idem, p. xi

4 idem, p. 107

5 idem, p. 108

6 Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth” http://mises.org/pdf/econcalc.pdf.

7 Jesus Huerta de Soto, “Socialismo, Calculo Economico y Funcion Empresarial”, p. 105,

8 See Joseph T. Salerno, “Poscript: Why a Socialist Economy is “Impossible”.”, p. 35 http://mises.org/pdf/econcalc.pdf.

9 Mises, p. 9.

10 Mises, p. 15

11 Mises, p. 15

12Medicare Payment Advisory Commission, “Report to Congress Medicare Payment Policy, March 1999” p. 5 http://www.medpac.gov/documents/Mar99%20Entire%20report.pdf

13 idem, p. 4

14 Medicare Payment Advisory Commission, “Hospital Acute Inpatient Services Payment System”, October 2007 p. 3 http://www.medpac.gov/documents/MedPAC_Payment_Basics_07_hospital.pdf

15 idem, p. 3

16 Medicare Payment Advisory Commission, “Hospital Acute Inpatient Services Payment System”, October 2007 p. 4

17 Mises, p. 15-17

El Socialismo del Banco Central de EEUU

2008-10-07T20:29:00.012-05:00

La perspectiva de los que proponen más intervención por parte del estado como solución a los ciclos económicos que periódicamente han experimentado los sistemas económicos durante los últimos 150 años, tanto los que llamaríamos menos socialistas como Estados Unidos y los más socialistas, como la gran mayoría de Europa y China, Cuba y la Unión Soviética, desconocen las causas fundamentales de esos ciclos económicos.

Marx fue uno de los primeros en estudiar el hecho de que el capitalismo de la revolución industrial padecía de ciclos económicos (es decir, "booms" y depresiones) que fases anteriores del desarrollo de la humanidad no había experimentado. Sí, es cierto, de vez en cuando algún rey se metía en una guerra, subía los impuestos o se robaba el oro de los súbditos, causando una hambruna, pero en lineas generalas, pero nunca hubo un ciclo generalizado de crecimiento y depresión que se repitiera continuamente como durante la revolución industrial. Los marxistas creen (o creían) que esos ciclos eventualmente se agudizarían, las masas se rebelarían, el capitalismo caería por sus mismas contradicciones internas, la propiedad privada sería abolida y el comunismo se establecería como sistema. Y la gran mayoría de los economistas no-marxistas desde principios del siglo xx a raíz de la teoría de John Maynard Keynes, piensan que el estado interventor puede modular y estabilizar esos ciclos y depresiones. Pero ambos están de acuerdo en que la culpa la tiene el capitalismo y que lo que nos puede salvar de los ciclos es una intervención masiva del estado. Eso es lo que hemos visto a propósito del paquete de rescate que acaban de aprobar en USA, apoyado por parte de los centros del poder en Wall Street, Washington y los medios de comunicación tanto de izquierda como CNN, como los de derecha como Fox y el Wall Street Journal.

Lo que Marx no pudo reconocer porque muy pocos economistas hasta ese entonces habían desarrollado el aparato teórico para analizar lo pasaba, era que junto con la revolución industrial también se desarrolló la industria bancaria de reserva fraccionaria.

La banca evoluciona jurídicamente desde una etapa en la que es inmoral e ilegal prestarle a terceros tus depósitos a la vista sin tu permiso, a una en la cual esa práctica de crear crédito es aceptada por los banqueros y legalizada y empujada por el estado mediante el banco central. El sistema de reserva fraccionaria es muy sencillo. Si tú depositas $100 en un banco, este le presta $90 a terceros y se queda con $10 como reserva (10%). Tú como depositante actúas como si en realidad tuvieras $100 en el banco, es decir, tus patrones de consumo no cambian porque en cualquier momento, tú puedes ir a retirar tus depósitos inmediatamente.

La banca evoluciona jurídicamente desde una etapa en la que es inmoral e ilegal prestarle a terceros tus depósitos a la vista sin tu permiso, a una en la cual esa práctica de crear crédito es aceptada por los banqueros y legalizada y empujada por el estado mediante el banco central. El sistema de reserva fraccionaria es muy sencillo. Si tú depositas $100 en un banco, este le presta $90 a terceros y se queda con $10 como reserva (10%). Tú como depositante actúas como si en realidad tuvieras $100 en el banco, es decir, tus patrones de consumo no cambian porque en cualquier momento, tú puedes ir a retirar tus depósitos inmediatamente.

El problema comienza cuando esas personas quienes recibieron el préstamo de $90 a su vez depositan ese dinero en otro banco, ya que ese banco va a quedarse con $9 en reserva (10%) y va a prestar $81. Esos $81 prestados entran en otro banco como depósito a la vista nuevamente y se quedan como $8 de reserva (10%) y ese banco presta $73 y así sucesivamente hasta que se crea un "paquete chileno" como se dice en Venezuela o una pirámide en la que de tu depósito inicial de $100 la banca crea en esos primeros tres pasos $244 ($90+81+$73) de la nada. La banca por supuesto apoya ese sistema porque esta gana dinero prestándolo. En ese sistema bancario de reservas fraccionarias, los bancos se mantienen solventes siempre y cuando los depositantes no retiren sus ahorros a la misma vez. Los bancos centrales son creados por los banqueros y el estado para facilitar ese proceso de creación artificial del crédito. A los banqueros prefieren esa intervención del estado porque les permite a todos ellos coordinar sus acciones en conjunto y porque el estado les deposita aún más efectivo en sus activos, dándole más oportunidades para crear aún más crédito. Y al estado le interesa el banco central para poder financiar sus gastos mediante otro proceso complementario a los impuestos que es el de la inflación, puesto que los primeros en gastar ese dinero nuevo lo hacen antes de que los precios suban. En líneas generales, son los empleados del gobierno, los militares y los más allegados al estado quienes se benefician de ese dinero nuevo. Una vez que ese dinero comienza a circular, suben los precios y baja el poder adquisitivo de las clases menos allegadas al estado, generalmente la clase media, los pobres, los empleados del sector privado y los profesionales.

A medida que esa creación de crédito artificial de la nada sin una verdadera base real de ahorros, disminuye la tasa natural del interés. Un crédito en realidad no es sino un un bien en el presente (dinero en efectivo que puede ser usado ahora) intercambiado por un bien en el futuro (el pagaré que nada más puede ser usado mañana). Como la gente siempre prefiere dinero en el presente en vez de la misma cantidad en el futuro, el dinero en el presente siempre comanda una prima por sobre el dinero en el futuro. Esa es la tasa de interés y esta es determinada por el valor que la gente le pone al presente en comparación con el futuro. Mientras la gente valora al presente menos, van a consumir menos y ahorrar más y por la misma razón la tasa de interés va a bajar. Mientras más ahorro existe proporcionalmente al consumo, más baja es la tasa de interés y más inversión existirá. Esa es la clave para el crecimiento económico, el ahorro.

Cuando el crédito es creado de la nada por la banca, cuando el estado promueve ese crédito y dinero fácil mediante el banco central, también baja artificialmente la tasa de interés. Un interés bajo da la señal a los emprendedores de que la gente está ahorrando más que antes y que por ende son rentables aquellos proyectos de inversión en bienes de capital como maquinarias, procesos industriales y construcción, que a un interés natural más alto no eran rentables. Los emprendedores comienzan sus proyectos capitales y para emplear a sus trabajadores tienen que aumentar el salario para atraerlos de sus empleos actuales en industrias de bienes de consumo (alimentos, ropa, bebidas, servicios, etc.). Esta es la fase del "boom" económico en la que los sueldos y los ingresos suben y que como regla general afecta al sector capital de la economía pero no afecta al sector de bienes de consumo (alimentos, ropa, etc.). Pero hay que darse cuenta de que la creación de créditos de la nada por parte de la banca y el estado y la creación de ese "boom" se hace sin la base fundamental del sacrificio de no consumir bienes de consumo (alimentos, ropa, etc.) en el presente, es decir, el ahorro.

En cuanto el emprendedor dueño de un proyecto comienza a pagarle a los trabajadores esos salarios más elevados, los que reciben esos pagos en realidad no han cambiado sus patrones de consumo y ahorro que una tasa de interés baja indicaría, sino que ellos van a consumir y ahorrar ese ingreso en las mismas proporciones que antes. Los trabajadores no van a querer ahorrar más de lo que estaban ahorrando antes y van a gastar el dinero en bienes de consumo (alimentos, bebidas, ropa, etc.) en vez de ahorrar para cubrir los costos de las maquinarias, equipos y materia primas en la que los emprendedores invirtieron. Los trabajadores valoran al presente en la misma proporción que antes y por ende van a forzar la tasa de interés a subir al nivel natural que existía antes del "boom". También recordemos que la industria de bienes de consumo no ha crecido. La industria que ha crecido es la de bienes capitales. Ahora la industria de bienes de consumo va a reaccionar ante ese incremento en la demanda de sus productos y va a crecer mientras que los emprendedores en en las industria de bienes capitales no van a poder pagar por sus maquinarias, equipos, materia prima, etc. ni por sus empleados, quienes ahora están siendo atraídos por las industrias de bienes de consumo. Esta es la esencia de una depresión. Es la etapa de corrección por la que inevitablemente hay que pasar para liquidar la mala inversión causada por la seducción de intereses bajos manipulados por el sistema bancario de reserva fraccionaria apoyado y aupado por el banco central del estado.

Si el estado no controlara a la banca mediante el banco central (en USA el Federal Reserve Bank) y no apoyara al sistema de seguro bancario (en USA el Federal Depositary Insurance Company o FDIC), es imposible que todo el sistema bancario de reserva fraccionara coordinara sus actividades y crease estos "booms" y depresiones. Sin un banco central y sin ese seguro del estado, cada banco correría un riesgo enorme de un los ahorristas se darían cuenta que el banco no tiene suficiente capital para respaldar sus ahorros los retirarían, causando un pánico bancario en ese banco. Al esto suceder, el banco tendría que retirar sus préstamos y declararse en banca rota. Eventualmente solo sobrevivirían aquellos bancos que no practicasen reserva fraccionaria.

Sin reserva fraccionaria y sin banco central, bajos impuestos y poca regulación por parte del estado, sería la proporción entre el ahorro y el consumo lo que determinaría la cantidad de capital acumulada en una sociedad y por ende su desarrollo económico. El mismo Marx reconoce que el capital es lo fundamental y por eso titula su obra maestra Das Kapital. La clave del crecimiento es el ahorro. Mientras la gente sacrifica más el consumo en el presente y guarda el dinero dentro de una sociedad de mercado, más oportunidades existirán para que los emprendedores inviertan ese dinero en procesos productivos intensivos en el uso del capital. Pero los cambios en las proporciones de cuánto ahorran y cuánto consumen y por ende los cambios reales en la tasa de interés serían lentos que tardan décadas en hacerlo. Ello le permite al emprendedor, si es que es competente en su profesión y en pronosticar, de comenzar y terminar su proyecto. Y también le permite aumentar la productividad del trabajador. Por ejemplo, en vez de construir un carro a mano, el capital te permite construir 100 carros usando maquinarias. A su vez aumenta el consumo, bajan los precios y se obtiene un crecimiento sostenible. Y la clave es que sin banco central y sin reserva fraccionaria, el trabajador recibe su salario de manos del emprendedor, y como este va a consumir y ahorrar en la misma proporción que siempre había consumido antes, no hay desequilibrio entre los sectores productivos de la economía (bienes de consumo y bienes capitales) que existe con una banca de reserva fraccionaria y un estado interventor y el emprendedor puede entonces llevar a cabo su proyecto.

Entonces, es el estado quien está en la médula de las crisis económicas y por definición, el estado no puede resolver el problema. Economistas como Keynes y sus seguidores piensan que el estado puede determinar la tasa de interés, pero es que cómo va a saber el estado cuál es la tasa de interés natural, es decir, el precio del dinero, a menos que deje que el mercado la calcule? El experimento comunista de la Unión Soviética, China, Cambodia y Cuba y los millones de personas que murieron de hambre al esos estados eliminar al mercado demostraron contundentemente que el estado no puede determinar los precios del sistema económico sin crear caos, hambre y muerte. El experimento socialista Keynesiano de un estado interventor y regulador en USA, Europa, y el resto del mundo vienen demostrando ya por más de 150 años que el estado tampoco puede regular la política monetaria del sistema económico sin causar ciclos económicos.

Los que acusan al supuesto experimento neoliberal de los últimos 30 años ignoran el hecho de que ha sido una era de un intervencionismo agigantado por parte de todos los estados y sus bancos centrales, en especial el Federal Reserve de USA. No tienen sino que reconocer los déficits, las guerras, las inflaciones y los programas sociales de esos estados en los últimos 30 años. No ha sido un experimento liberal. Ha sido la continuación y la aceleración del mismo proceso interventor que comenzó a principios del siglo XX. Sí, es cierto que cuando Reagan, Thatcher, y Pinochet, por ejemplo, se trata de echar para atrás la regulación del estado un poco, pero llamarlos liberales es un error, en especial porque todos apoyaron a la banca de reserva fraccionaria, al banco central, a sus proyectos militares y demás gastos por parte del estado. De hecho ninguno de ellos logra disminuir el tamaño del estado. El que Pinochet hubiese arreglado el desastre económico de Allende no es gran cosa. De la misma manera, cualquier pistolo podrá arreglar el desastre que es Cuba con simplemente dejar que la gente pueda tener propiedad privada.

El engaño, entonces, no es del mercado. El engaño es del estado, quien mantiene tanto a las masas en una ignorancia que solo beneficia al estado mismo, sus burócratas, sus militares, al sistema bancario, y a los intelectuales que los apoyan.

El engaño en el que participan los intelectuales defensores del estado es especialmente grave. Cómo es posible que mantengan que los derechos humanos que son inalienables por definición, puedan ser alienables? Los derechos pueden ser violados por el estado o por otros individuos, pero jamás son alienables. Les pertenecen a los seres humanos porque son, porque existen. Es axiomático, esa es la definición de un derecho inalienable: yo soy dueño de mi cuerpo, del fruto de mi trabajo, de mi propiedad privada, de mi libertad, de lo que intercambio voluntariamente, de mi vida. El estado no crea esos derechos. Los crea Dios. Nadie te los puede quitar, ni tú mismo. Por ejemplo, tú no puedes entrar en un contrato de esclavitud permanente. En cuanto caemos en el error intelectual de pensar que esos derechos son alienables o que el estado crea esos derechos o simplemente que los garantiza de alguna manera, cometemos un error fundamental y de allí pasamos a pensar que el estado tiene que intervenir para garantizarlos. No, esos derechos los tenemos que garantizar todos y cada uno de nosotros mediante nuestra acción individual y mediante el reconocimiento de la ley natural. El mercado ni la participación en el mercado como productores o consumidores definen los derechos humanos. Pensar que solo tenemos derechos humanos cuando participamos en el mercado es un error de lógica. Todo lo contrario, son los derechos humanos los que definen la necesidad del mercado. Es justamente el hecho de que somos creados libres lo que determina el que solamente en un mercado libre podemos actuar con libertad. Esos derechos humanos crean al mercado libre. En cuanto el estado fuerza esas relaciones de acción interpersonal, mediante los impuestos, mediante sus prohibiciones, mediante la manipulación de la tasa de interés, o cuando otras individuos violan esos derechos, por ejemplo, el derecho a la propiedad privada cuando un banco presta a terceros el dinero de los que ahorran sin su permiso, se crean las crisis y los problemas.

A menos de que los que promueven al estado interventor propongan una teoría coherente de porqué suceden los ciclos económicos y que explique cómo más intervención estatal evitaría los ciclos, vamos por malísimo camino. Puede ser que la catástrofe mundial causada por el intervencionismo del estado en la política monetaria que va a ser agravada y alargada por este paquete de rescate recientemente aprobado nos haga reflexionar e imponer sensatez en es asunto.

That 70's stagflation is back!

2008-02-27T19:05:00.003-06:00

Recent articles on the specter of stagflation are right on. What is not made explicit is the cause of stagflation: the Federal Reserve. Since its creation in 1913 when the federal government nationalized our money supply, we have allowed the hand of politicians inside the cookie jar of easy money. As expected, they can’t stop eating.

The root cause of stagflation has been known for over a hundred years. As the Fed creates money out of thin air to finance politicians’ expenditures, prices must increase (inflation). Printing of money also causes a reduction of the interest rate below its natural level. The natural rate of interest is not controlled by the Fed but is controlled by the proportion of income consumers save versus what they spend. The more they save, the lower the natural interest rate, the higher the level of investment, the higher the productivity of labor and the higher the level of economic prosperity. But an interest rate artificially below what real savings rate supports gives investors, entrepreneurs, businesses, banks and homeowners the wrong economic signal: projects that would not have been profitable and would not have been started now become viable, at least for a while. But the inevitable correction necessary to liquidate all of these malinvestments always come because the distorted capital structure in the economy is not supported by real savings. Instead, the capital structure is supported by nothing, by thin air, by paper money. As this paper money flows from the Fed to the central government to banks to businesses and finally to consumers in the form of higher wages and as consumers save at their natural rate rather than the higher rate implied by the artificially low interest, they spend more on consumer goods and less on savings. As the economy grapples with an amount of consumer savings that is insufficient to support the total investment in capital to which business and entrepreneurs are committed, like a pyramid scheme, those now unprofitable capital projects on the bubble collapse (it could be investments in the stock market, businesses, dotcoms, mortgages, whatever) and are liquidated (recession).

If at the same time that the bubble bursts the Fed accelerates the money printing machine, as it is doing now and as it did back in the 70’s, we get a recession caused by manipulation of the interest rate with inflation caused by printing money (stagflation). Boom and bust cycles and inflation are not inevitable characteristics of capitalism free from government intervention. But these cycles are the predictable consequence of the actions of the Federal Reserve. Politicians cannot fix the mess they got us into by printing more money and lowering interest rates because that was the cause of the mess to begin with!

The only way to manage our politicians’ addiction to the cookie jar of paper money is to smash their jar once and for all: dismantle the Federal Reserve, privatize our money supply and bring back the gold standard. Until politicians can figure out how to create gold out of thin air, the gold standard is the only way to force stability on our supply of money and the only way to stop them from causing inflation and recessions. Plus, it is the only way to keep politicians at the federal level honest: with their ability to get their hands in the cookie jar gone, they would be forced to increase taxes rather than print money in order to finance federal expenditures, just like state and local governments are forced to tax to spend. This was one of two critical elements of the vision for sound money of our Founding Fathers (the other one was to severely restrict the ability of the federal government to impose taxes on individuals). Thomas Jefferson fought hard and eventually succeeded in closing down Alexander Hamilton’s federal reserve/central bank scheme. Jefferson knew that giving the power to create money to the federal government would be the beginning of the end of the American experiment. Jefferson was and still is right. I mean, if we all intuitively know that printing money is wrong for private individuals, what in the world makes us think that it is right for the Fed to counterfeit at such monumental levels?

Why health insurance does not work

2008-02-23T12:01:00.012-06:00

The object of insurance is to cover a large loss to the policy holder triggered by an event that is outside one's control. The probability of the loss caused by this uncontrolled risk and the cost associated with it must be calculable in a large group of random policy holders so that in exchange for an affordable premium, the insurance company can pay for the loss and make a profit.

Sickness combines both controllable risks and uncontrollable risks born by the policy holder. Breast cancer, for example, occurs at predictable rates in large groups of females and is beyond the control of the policy holder; therefore, it can be insured against. But routine diagnostic tests, for example, follow patterns that are influenced, at least in part, by the individual choice of the policy holder and are hence a type of risk controlled by the policy holder. The more that diagnostic tests are covered by insurance, the more that the insurance contract encourages their use and the higher the costs to the insurance company. This is the phenomenon of “moral hazard” in which the actions of the policy holder change the value of the insurance contract. Facing this type of uninsurable risk, insurance companies react by increasing premiums, copays and deductibles. There comes a point in which premiums, deductibles and copays become so large relative to the protection offered, that the covered group faces “adverse selection” and becomes non-random as healthier policy holders chose to drop out and only high cost individuals remain insured.

The only sensible system to cover risks controlled by the patient is in an environment in which fee for service dominates the market, similar to the car maintenance model. This is, of course, what we had in the US prior to the hospital and physician sponsored Blue Cross and Blue Shield and HMO plans of the 1920’s and 1930’s. These plans were the first ones to introduce first dollar coverage for risks controlled by the policy holder and, while they may have attempted to manage the business consequences of moral hazard and adverse selection, they did not understand the negative economic and political consequences that their business model would cause decades later. These consequences (enumerated below) were exacerbated by two factors. One, the prevalence of employer provided health benefits resulting from the wage and price controls imposed by the US government during WWII and the tax code which forced employers to compete for qualified personnel not via wages but via tax deductible benefits such as group health insurance. Two, the introduction of Medicare and Medicaid, modeled after Otto von Bismarck’s Health Insurance Act scheme implemented in Germany in the 1880’s. Bismarck’s plan was the first one to ever attempt compulsory social insurance. Lenin and Stalin in Russia, Mussolini in Italy, Franco in Spain, Hirohito in Japan, Hitler in Germany, Castro in Cuba, Peron in Argentina and FDR in the US, have all followed Bismarck’s model: welfare payments mandated by the state and paid for through taxation, government debt and inflationary monetary policy.

The economic consequence to the manner in which private health insurance and socialized welfare medicine are structured in the US is obvious to everyone: over utilization, high costs, high taxes, poor outcomes, rationing, price controls, adverse selection, large pools of uninsured, etc. The cause and effect mechanisms that result in these problems all stem from a pricing structure that is not the result of the free exchange between patients and providers, but the result of government intervention. Without the clear guide of prices, patients, hospitals, insurance companies and physicians cannot rationally plan their actions. The details of these mechanisms are beyond the scope of this article, but some of them are explored by this author here and here. The political consequence of this structure in the healthcare market is that industry, welfare, professional associations and business interest groups continually call for more government regulations and more medical socialism and that politicians of both parties effectively respond to those calls. Practically nobody is seriously challenging the flawed assumptions of the existing healthcare model. If anything, in the hopes that more government intervention will help save the current system, movement towards medical socialism has accelerated in the past two decades.

A sensible step towards reform away from medical socialism would be the deregulation of the private health insurance industry and allow individuals and families to deduct individual policy premiums from their income tax. Such a deregulated environment would encourage individuals to take responsibility for their controllable risks, would bring back a fee for service environment for a small but significant portion of the healthcare market and would allow insurance companies to:

Insure primarily against uncontrollable risks
Not insure against controllable risks, which result in moral hazard and adverse selection
Underwrite individual policies, the practice of determining how much coverage the policy holder should receive and determining the premium
Move away from community rating, the practice of charging the same premium to healthy people and to sick people

These reforms will re-introduction a rational pricing system for at least small but meaningful sectors of the medical market that can guide the actions of patients, physicians, hospitals, other healthcare providers and entrepreneurs.

Eminent domain, border fence & immigration

2007-12-15T08:46:00.002-06:00

The newpaper reports about the Tamez family of El Calaboz , Texas who is resisting the plan for a border fence on their property, is a chilling reminder of how far we have allowed the federal government to take away our rights, especially since 9-11. In a sense, the terrorists have won. They have conned us into accepting a pact with the devil: “give me your freedom”—he says, “and I will give you security.” Now the people implementing that pact, the same people who gave visas to the 9-11 terrorists, the same people who could not thwart the 9-11 plot, the same people who suspended our right to seek relief from unlawful detention and the same people who monitor our bank accounts, listen to our international phone calls and read our emails without a search warrant issued by a judge and without our knowledge, these same people are going to use eminent domain to expropriate the Tamez land. The whole affair should remind us that what is at stake here with all the anti-immigration hysteria is not the Tamez family’s “psycho-historical attachment to the land,” nor Americans’ inability to “understand their own history” as one of your interviewees in the article below suggested. No. The question the Tamez family plight raises is how the border fence and all other anti-immigration efforts violate our own private property rights here in America.

Eminent domain is a fancy name for the violent expropriation of our private property by the state. It forces a law abiding US citizen to give his property to the state in exchange for “fair market value.” This is simply a violation of the natural right to use and enjoy our private property according to our wishes, as long as we are not violating anyone else’s rights. Eminent domain expropriation is a form of involuntary violent exchange. Even if there is payment by the government at a “fair market value” this does not make the expropriation legitimate because the government cannot ever compensate a property owner for the subjective value he assigns to his property. Fair market value is only meaningful when both parties to the exchange voluntarily agree to a price, which is how things work in a true free market. Expropriation, therefore, is more akin to highway robbery than the sale of any good.
One powerful argument for the border fence is that it will prevent illegal immigration. But do we ever ask ourselves if restricting immigration (legal or illegal) violates our individual private property rights? As long as the illegal immigrant is moving into a piece of private property whose US owner is willing to take him, there is nothing wrong with their exchange. This is a voluntary transaction, free from coercion and without any victims. When the immigrant crosses the border and is employed by a factory that needs labor, eats at a restaurant that needs patrons, rents a vacant apartment from a landowner, whose rights are violated? These are mutually beneficial forms of economic exchange in which both parties agree to a price and exchange goods and services. Nobody’s rights are violated. But on the other hand, when the government tells a farmer that he cannot hire an immigrant from Mexico to pick tomatoes, when it tells a mother that she cannot hire a babysitter from Guatemala to care for her children, when it tells a landlord that she cannot lease her apartment to an immigrant from Nicaragua to fill a vacancy, when it tells a hospital that it cannot hire a nurse from the Philippines to take care of patients, when it tells a high-tech company that it can not hire a programmer from India to program its computers, when the government does this to prevent immigration, whose rights are violated? The private property rights of farmers, mothers, landlords, hospitals and high tech companies to use their property for their own business goals. Does this mean that Mexican immigrants have an inherent right to come here simply by virtue of their economic plight in Mexico or by virtue of the demand for their services? Absolutely not. But what it does mean is that property owners have the right to decide who they want in their property, regardless of the legal status of the person with whom they are making an economic exchange. As long as both the immigrant and the property owner agree voluntarily to the terms of the exchange and as long as they are not violating other people’s rights, there is nothing wrong, unnatural, unethical, improper or unconstitutional with such arrangement.

p>Some would argue that since immigrants and illegal immigrants abuse our welfare system and use our libraries, schools and other so called “‘public goods”, the rights of property owners must be superseded by the government acting act on behalf of the common good, the nation or the taxpayers. But this argument is in fact more of a condemnation of welfare rather than of illegal immigration. Among many evils, welfare creates a permanent underclass, promotes dependency on the state, increases unemployment, destroys the moral character of the recipient, reduces the spirit of giving and is financed by coercive taxation of working men and women. We must end the welfare state for everybody, not just immigrants.

Others argue that since immigrants might use welfare in the future we should also curtail immigration now. This argument is also wrong. If it was correct, it would mean that we should incarcerate all young black males on the grounds that some of them will commit crimes in the future or that we should prevent Hispanic females from having children because some of them will be involved gang crime when they grow up. In any event, all these “public goods” should be privatized, thus eliminating the illegal immigrant free rider problem. But even if we don’t have the political will to do so and public goods remain subsidized by taxation, I am certain the tax bureaucracy in Washington and the state capitals can figure out a way to keep track of and force immigrants to pay their share of taxes, just like it forces the rest of us.

Finally, some make perhaps the most powerful argument against illegal and legal immigration--that immigrants will destroy the American culture that makes freedom itself possible. But once again, this is incorrect. First of all, we are no longer the freest country in the world. Hong Kong , Singapore and Australia already score higher than the US in the Index of Economic Freedom published by the Heritage Foundation. Second, countless immigrants and their children and grandchildren have promoted freedom throughout our history. Third, at least in the near future, these "conniving" immigrants would be using owr own democratic system to destroy our way of life. But think about it, that millions of Hispanics could vote for communism, socialism, Nazism, welfareism or other interventionist programs is more a condemnation of the US system of democracy than of illegal immigration. That anybody, not just immigrants, can vote to support the right of a third party to forcefully take away our property is the biggest real threat to our freedoms. These freedoms have been taken away systematically using majority rule voting ever since President Lincoln waged the War to Prevent Southern Independence; therefore, we know this erosion started prior to the current wave of Mexican illegal immigration. Granted, many of those past voters were immigrants from Italy , Ireland or Germany , but by and large, we must admit that regardless of our migratory background, we have been the ones using democracy to undermine our own freedoms.

If we are serious about significantly curtailing Mexican immigration, there are very effective and very inexpensive ways to reduce it to a trickle without violating US citizen’s private property rights. It is simple: the inevitable tendency for people to migrate from poorer countries with excess supply of labor (like Mexico ) to richer ones with shortages of labor (like the US ) has a direct and opposite counterbalancing flow that is currently blocked: the flow of capital in the opposite direction. The federal government, therefore, could unilaterally declare the full free flow of capital from the US to Mexico and the free flow of goods from Mexico into the US . Under such unilateral free trade conditions, entrepreneurs and capitalists would take advantage of cheaper labor in Mexico and move their capital across the border to build plants and equip farms. If those Mexican goods were allowed to freely flow into the US , American consumers would benefit from more and cheaper goods and American capitalists would benefit from a higher return on capital. But more importantly, these flows of capital and goods will cause an increase in the demand for labor in Mexico, which will increase wages in Mexico and will thus reduce the pressure that the Mexican poor feel to migrate to the US. Ergo: no need for artificial restrictions on immigration, no need for a fence, no need to violate Americans’ private property rights. But alas, that would mean the unmasking of the political machinery of fear and xenofobia that seems to have taken over America. Therein lies the rub.
For the newspaper report on the Tamez family plight, click http://www.valleymorningstar.com/news/land_15400___article.html/border_tamez.html

Outline for a critique of HillaryCare II

2007-09-29T05:35:00.001-05:00

The Clinton Campaign unveiled their health care plan this week. It features a mixed bag of carrots and sticks that are to end the cost spiral and give universal coverage for all Americans (see note 1 below for summary). HillaryCareII will be financed by increasing taxes for the rich and reinvesting the savings from running a more efficient system. Efficiencies will be gained by promoting the adoption of information technology to cut costs, research and promotion of best practices for providers and paying for prevention rather than acute care.

HillaryCareII features the “Principles of Shared Responsibility”:
1. Drug companies should offer fair prices
2. Insurance companies should cover everyone regardless of pre-existing conditions, expectations of illness
3. Providers should collaborate to provide quality care
4. Employers should contribute to health coverage, large firms required to provide insurance; small business should take advantage of tax credits
5. Government will make insurance affordable through tax credits, provide a safety net so that insurance is not a financial burden, and will end cost spiral.
6. Individuals required to buy insurance

It is easy to see that while HillaryCare II may reach universal coverage for all Americans, it will not solve the problems of the current health system, including the cost spiral. This is because HillaryCareII does nothing to question the paradigm under which the current system rests: that government can rationally design the reimbursement mechanisms and set payment rates for provider services, the same governmental comand and control tactics that have failed int he past.

Democratic and Republican reform initiatives leave untouched Medicare’s command system of setting prices for health services based on costs of production. The prices of healthcare services (or any consumer good for that matter) are NOT based on the costs of labor, supplies, rent, capital, etc. Medicare administrators and their supporters in academia and government have the cause and effect relationship between prices and costs exactly backwards! Costs of production do not cause prices. Prices are set by the subjective judgments and valuations of individual producers and consumers exchanging goods in a free market, irrespective of production costs. In response to these prices and expected profits, entrepreneurs and business managers bid up the prices of factors of production like labor and supplies. That in the long run or that in perfectly competitive markets prices equal costs of production plus the interest rate is irrelevant. What determines the price of a service here and now is the short run adjustment mechanisms that allow producers to bid for factors of production to meet a consumer need and make a profit.

When Medicare tells providers what they will get paid for a heath service, it sends a signal to providers to bid up the prices of labor, supplies and equipment to meet the new price level. The result is a feedback loop between Medicare and providers, out of control costs, distortions in labor markets for physicians and nurses and a capital structure for health services ready to break down. The solution to the government induced mess in healthcare is as simple as it is politically incorrect: get the government out of the healthcare financing business, privatize Medicare and let the free market rationally allocate capital, labor and other resources based on consumer preferences.

Theoretical problems with HillaryCare II from an economic perspective:

The problem of the imputation of value
The problem of calculation
The problem of dissemination of knowledge Hayek
The problem of entrepreneurship P 698 Human Action
The problem of disruptive technology p. 706-707
The problem of the allocation of capital . p 704
The problem of allocation of the factors of production without prices
The problem the computation of profit and loss without prices in P 701
The problem of changes in consumer tastes p. 706

Note 1: Key carrots (+) and sticks (-) of HillaryCareII are:

For Individuals:
+Individuals can keep their current health plan.
+The congressional private health plan menu is expanded to the general population
+Medicare expanded to the general population as an additional choice.
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.
+Expand Medicaid to all low income individuals
+Expand health plan menu to fill the gap for early retirees before qualifying for Medicare
-Repeal Bush tax cuts and redirect revenue to fund program.
+Limit premium payments to a % of income yet maintain consumer price consciousness in choosing plan

For Insurance Companies:
-Medicare overpayments to HMO’s phased out.
-Guaranteed issue, automatic renewal
-No rating based on age, gender, occupation…
-No excessive profits or marketing costs
-Cannot deny coverage or renewal, unfair prices, excessive premiums
-Cover preventive care
-Cover chronic illness care management
-Promote prevention

For pharmaceutical companies:
-Pharmaceutical companies regulated to control their relationship with providers, cut prescription drug ads, prohibit direct to consumer ads.
-Medicare is allowed to negotiate directly with pharmaceutical companies to cut prescription drug costs

For providers:
-Disproportionate Share payments phased out.
+Apply technology and clinical best practices to improve quality, reduce errors, eliminate waste via technology, care coordination, best practices
-Align Medicare payment with performance, reduce geographic variation in care, information to consumers,
-Expand pay for performance based on outcomes

For employers:
+Tax credits for small businesses
+Employers expected to provide health insurance to their employees
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.

For more details on HillaryCareII go to http://www.hillaryclinton.com/feature/healthcareplan/

Federal Reserve Kool-Aid

2007-09-19T07:22:00.001-05:00

The Federal Reserve could not resist the heat of the subprime mortgage market correction and is passing out more of the same Greenspan Kool-Aid: lower interest rates. This is the same drink that caused the housing bubble to burst in the first place! Every time the Fed lowers interest rates it signals entrepreneurs to mal-invest in long term projects that would otherwise be deemed unprofitable and unwise. When these expanding businesses bid up the price of labor, land, supplies, etc., we all feel the sugar high of the Kool-Aid in the form of increasing wages. Eventually, however, our economy cannot handle this boom and we have the inevitable sugar low of a market correction.

The true signal for businesses to invest more or less is not the Fed, but the natural relationship that exists between the proportion of income we want to dedicate for consuming today and the proportion of income we want to save for the future. This consumer time preference determines the free market interest rate. The more we want to consume today, the higher the interest rate. The less we want to consume today, the lower the interest rate. Think about it, if we expected the world to end next year, we would all want to consume as much of our income as possible before the end and we would save little or nothing. In this case, the interest rates would be very high as nobody would want to lend any money unless the return was extremely high. Conversely, if we were all made immortal, there would be no need to consume our income rapidly. On the contrary, we would want to save as much as possible for the future. In this case, the interest rate would be very low as everybody would be willing to lend money at extremely low rates.

Because of Fed-manipulated low interest rates, businesses believe that our time preference has changed, that we want to consume less now and save more for the future, so they go ahead and mal-invest in long term capital projects, thinking that we have the savings to back-up those investments. In reality, nothing has changed, our time preference has remained the same, we want to continue consuming today the same proportion of our income that we always have consumed. When the higher incomes resulting from the boom hit our pockets, we start demanding more consumer goods today. But the capital structure of the economy is not equipped to supply those goods today because instead, businesses invested in projects to produce goods for the future, not for today. The end result is that the entrepreneurs who mal-invested go out of business, incomes drop, workers lose their jobs, etc. This inter-temporal distortion in our capital structure of production caused by the Fed is the root cause of bubbles and bursts for the past 100 years, including the Great Depression, the stagflation of the 70’s, the high-tech bubble of the 90’s and the current housing bubble.

If we had an actual change in the time preference and consumers indeed consumed less today and saved more for the future, then interest rates would drop and entrepreneurs would get the signal to invest in long term projects. As these projects bid up our wages and the extra income hits our pockets, we would save a higher proportion of our new income and would not cause an increase in the demand of consumer goods for today. Eventually, as the new capital projects start producing consumer goods, the prices of consumer goods fall and our standard of living increases, all without a bust and without inflation, indeed, with a drop in prices or deflation.

The way out of boom and bust cycles is simple: get the government out of the money business and eliminate the Federal Reserve.

Medicare Rx

2007-09-06T23:49:00.001-05:00

The fundamental flaw with Medicare’s system of paying for healthcare services is that it attempts to find out what it costs to produce medical services. These costs are then used to set provider fees using complicated cost-plus-profit methodologies (RVU, DRG, RUG, etc.). Medicare collects these provider costs through various vehicles that include requiring providers to submit cost reports (See http://www.cms.hhs.gov/CostReports/ for a summary of these reporting regulations).

The basic assumption of Medicare's complex approach is this: that the price of a healthcare service is based on the costs of producing that service. But Medicare administrators and their supporters in academia have the cause and effect relationship between prices and costs exactly backwards! This is the same mistake that Karl Marx and his predecessor Classical economists David Ricardo and Adam Smith made in their unsuccessful attempt to explain how prices are supposed to be a reflection of labor costs and other factors of production costs like land, supplies, capital, etc. Costs do not cause price! The price of a product is set by the subjective judgments and valuations of individual suppliers and consumers exchanging goods in a free market. And it is this price that then determines costs of production! This takes place through a process of "value imputation" that flows from the consumer back to the factors of production. This "value imputation" happens when entrepreneurs and managers bid up the prices of factors of production in response to expected future profits.

Let us first illustrate the complexity of Medicare's attempt to collect cost information and then set prices. Medicare uses the following formula to determine the fees paid to physicians:

Work RVU x Budget Neutrality Work Adjustor x Work (GPCI)+Practice Expense (PE) RVU x PE GPCI+Malpractice (PLI) RVU x PLI GPCI= Total RVUxCY 2007 Conversion Factor of $37.8975= Medicare Payment

The three Relative Value Units or RVU's in the formula represent the value assigned by Medicare to the various resources needed to provide each physician service. The RVU's are supposed to reflect the work effort, skill, time, intensity and risk required of the physician depending on his specialty, his expenses in providing each service adjusted by a geographic practice cost index (GPCI), liability insurance costs (PLI), a "budget neutrality" cap on total Medicare payments to physicians mandated by Congress and the "conversion factor" which translates each RVU into a dollar amount.

RVU's were developed by the good folks at the Harvard School of Public Health in the mid 1980's when Medicare administrators awarded them a contract with the intent of establishing a rational, equitable and distortion-free approach to physician fees. Additional help was provided by KPMG Consulting who was charged with the development of the liability insurance cost factors. For a more detailed account of how those liability factors are determined go to http://www.ama-assn.org/ama/upload/mm/363/pliwhitepaper.pdf. And later still, more help was provided by experts in econometrics at the Urban Institute who developed the geographic practice cost index. Go to http://www.urban.org/publications/900540.html for fascinating account from one of its developers.

To coordinate the whole process, Medicare also enlists the help of the American Medical Association, the American Osteopathic Association and the major national medical specialty societies, all of whom participate in an advisory group ( RVS Update Committee http://www.ama-assn.org/ama/pub/category/16401.html) responsible for compiling data obtained from physician surveys to determine the time spent in performing the medical service and ranking the service relative to existing services.

There are over 10,000 values for each of the above three RVU categories, hundreds of GPCI's and PLI's adjusting each of those 30,000 RVU's resulting billions of potential combinations for physician fees. In the near future, Medicare will adjust this formula to reflect each physician's clinical outcomes or quality, which will result in another exponential increase in the number of potential combinations for fees. And this is only for the professional component of physician reimbursement. Physicians also receive Medicare payment for the facility components of certain procedures performed in their offices.

If one adds to this already mind-boggling array of physican fees calculations more layers of complexity represented by fees to hospitals, home health agencies, hospices, Medicare HMO's, ambulances, nursing homes and pharmacies, each with their own assigned methodologies for Medicare reimbursement, and one adds the mechanism by which the AMA and the government manipulate the supply of medical education (http://www.cogme.gov/) and hospitals and some state governments influence the supply of hospital beds through certificate of need regulations, one can only begin to appreciate the mammoth size and the power of the bureaucracies needed to attempt to centrally manage our healthcare system.

I wrote earlier that unlike what Medicare administrators assume, prices determine the cost of production. Let us illustrate the correct causal relationship between prices and costs with an example. Diamonds are expensive not because they cost a lot to produce, but because high demand and low supply forces prices to be high, which then allows producers to engage in the very expensive process of discovery, extraction and commercialization of diamonds. When diamond entrepreneurs are wrong in anticipating the price at which they will sell diamonds and their production costs are higher than the market price, their companies go out of business. When they are right and their costs are lower than the price at which they sell, they make a profit and prosper.

The higher their profits, the more other diamond entrepreneurs will enter the market, which bids up the prices paid to the factors of production or increases the quantity produced until, in the long run, the market for diamonds and the market for the factors of production of diamonds may approach equilibrium. It is only then that price of diamonds equal the costs of producing them. And it is then that casual observers are deceived into thinking that the price of diamonds is caused by their cost of production. This is because we tend to experience only the resulting price and costs of those companies that survive the competitive process. When we erroneously conclude that the value of a product is inherent in the costs of the inputs of the production process, we ignore the more vital and essential role played by the short run process of adjustments.

Theoretical work by the Austrian School of Economics since the 1870's has clearly refuted the incorrect theory of value that we inherited from the Classical school and Karl Marx and that economists and policy makers, including Medicare administrators, continue to use to this day. For an account of the Austrian approach and the theory of value imputation, see Ludwig von Mises' "Human Action" Chapter XVI, pp. 328-347 http://www.mises.org/humanaction/chap16sec2.asp:

"Attempts to establish cost accounts on an "impartial" basis are doomed to failure. Calculating costs is a mental tool of action, the purposive design to make the best of the available means for an improvement of future conditions. It is necessarily volitional, not factual. In the hands of an indifferent umpire it changes its character entirely. The umpire does not look forward to the future. He looks backward to the dead past and to rigid rules which are useless for real life and action. He does not anticipate changes... Profits do not fit into his scheme. He has a confused idea about a "fair" rate of profit or a "fair" return on capital invested. However, there are no such things... In a changing economy profits are not determined with reference to any set of rules by which they could be classified as fair or unfair. Profits are never normal..." pp. 346-347

The key insight of the Austrian approach is that not only are prices of consumer goods subjective, but that production costs are also subjective and determined through voluntary exchanges in a free market through a proces of value imputation that flows from consumers to producers to owners of factors of production. The collapse of the Soviet Union's economy has shown us that a centrally planned socialist approach based on an erroneous theory of value does not work in practice. This collapse has vindicated the work of many Austrian School economists who have shown since the 1920's that economic calculation under a centrally planned economy is theoretically impossible (for a devastating attack on central planning, see Ludwig von Mises' 1922 "Socialism" http://www.mises.org/books/socialism/contents.aspx).

Attempts by a central bureaucracy to use costs to set prices are not just difficult or "thorny" practical issues to resolve. Bluntly put, it is theoretically impossible for a PhD economist or a Medicare bureaucrat to figure out healthcare costs and therefore impossible for him to figure out the correct reimbursement rates for any healthcare service anywhere at any time. Only an unregulated free market where patients and physicians and other providers of healthcare services can voluntarily make exchanges can correctly solve the puzzle. The market for healthcare is not an exception to this inexorable and axiomatic economic law.

With the government sector accounting for more than 40% of healthcare spending (http://aspe.hhs.gov/health/costgrowth/) and with insurance and managed care companies and individual patients following Medicare's methodologies, the overwhelming majority of players in the healthcare market in the US are following a centrally planned socialist approach. The process and the results are disastrous and inevitable. First, Medicare compiles observed production cost data to calculate reimbursement rates or prices. Then healthcare providers take this price and it's implied expected future profit to bid up the price of the factors of production. The following year, these factors of production are then fed back to Medicare as costs to be used to determine the new reimbursement rates, and so on and so forth, into an ever ending negative feedback loop.

Is it any wonder that we have a collapsing healthcare system with ever increasing costs, misallocation of capital, meaningless prices, shortages, cues, rationing, cherry picking and fraud? Is it any wonder that a significant and ever increasing portion of patients are being priced out of the market and turning up in our emergency rooms as uninsured? Is it any wonder that patients, physicians, insurance companies and hospitals are pitted against one another with missaligned incentives in a battle to maximize Medicare dollars? Is it any wonder that Medicare taxes and deficit spending are causing an unprecedented inter-generational transfer of income from younger working poorer uninsured Americans to older, retired, insured and wealthier Americans?

CMS administrators should recognize that they are using a mistaken socialist economic theory to set their fees that will inevitably continue to bring the healthcare system to its knees. Physicians and hospitals should recognize that with this approach in which their own professional societies have actively participated, they have have lost complete control of their practices and hospitals and have simply become instruments of the state. And patients should recognize that their beloved Medicare has eroded the patient-physician relationship beyond recognition, one in which physicians can no longer respond to patient needs but to a bureaucracy in Washington.

Hay conflicto entre el hombre y el capital?

2007-09-05T20:47:00.001-05:00

Para Marx y todos los que aceptan directa o indirectamente su visión de la explotación, el capitalista supuestamente se queda con la diferencia entre el salario pagado al trabajador y el precio de venta de lo que el trabajador produce, lo que él llama la plusvalía. Eso es implícitamente lo que también acepta y enseña, lamentablemente, la Iglesia Católica.

Marx comete dos errores, uno, que el salario es determinado por el costo de subsistencia del trabajador y dos, que el precio de venta de un producto es determinado por la equivalencia entre la cantidad de trabajo contenidos en dos productos que se intercambian. Marx jamás pudo reconciliar los precios que él observaba en el mercado con la cantidad de trabajo que supuestamente los trabajadores invertían en los productos. Por eso interrumpe la escritura de su su obra maestra, "El Capital". Desde el punto de vista metodológico, él asume la explotación existe, que el capitalista se roba parte de lo que le corresponde al trabajador, y de allí trató de elaborar su teoría del capitalismo. Es el mismo cuento con la Doctrina Social de la Iglesia. Por eso Juan Pablo II habla del conflicto entre el capital y el trabajo, sin saber el error que comete en Laborens Exercems.

Los salarios no existieran si no existiera el capital!

Sin el capitalista, que es quien acumula capital, quien decide posponer su consumo en el presente, ahorrar, e invertir para luego consumir más en el futuro, todos nos veríamos forzados a producir algo directamente y consumirlo o venderlo. En ese mundo, ninguno de nosotros tendría salario sino ganacias. Todos tendríamos que poseer tierras, materiales y herramientas (capital). Muy pocas personas podríamos sobrevivir de esta manera. Lo que el capitalista hace es darnos la oportunidad para especializarnos y vender nuestro trabajo solamente, en vez de tener que vender el producto de nuestro trabajo. Si tuviéramos que vender directamente el producto de nuestro trabajo, pocos podríamos producir productos que llevan años en producir. Sería una economía muy rudimentaria, incapaz de darle de comer a más de unos cuantos.

Por otro lado, tenemos que preguntarnos por qué el trabajador prefiere venderle su trabajo al capitalista en vez de producir directamente. Es porque el salario representa para trabajador bienes en el presente mientras que su trabajo representa para el capitalista bienes en el futuro. El trabajador vende su trabajo porque prefiere los bienes en el presente a los bienes en el futuro. Los empleados de un empresario reciben un salario en el presente financiados por él, quien asume el riesgo de alquilar una oficina, comprar equipos y muebles, establecer relaciones con futuros clientes y esperar a vender, comenzar y terminar un proyecto para obtener un pago, muchas veces incierto, en el futuro. Para eso él tiene que invertir capital en su empresa y hacer un intercambio voluntario con sus empleados. Su capital no es sino el dejar de consumir en el presente para consumir más en el futuro.

La clave es que el empresario asume el riesgo de financiar le diferencia entre el presente y el futuro. A su capital invertido le corresponden ciertas ganancias que por lo menos teóricamente, si la empresa tenía éxito, le corresponden.

El capital que el empresario arriesga le permite al empleado obtener su salario ahora en vez de en el futuro. Otro ejemplo. Un carro. Si un trabajador quisiera hacer un carro por su cuenta y luego venderlo, se tardaría, digamos, tres años. Tendría que diseñarlo, comprar equipos, comprar materiales, construirlo, y luego venderlo. Durante todo ese tiempo está gastando dinero y además tiene que ver de qué vive, cómo compra comida, etc. El capitalista básicamente hace todo ese financiamiento de tres años para el trabajador. Y eso hay que pagarlo porque si no, por qué haría el capitalista esa inversión? Recuerdemos que él decide no consumir en el presente para consumir más en el futuro. Lo mismo que hacemos todos nosotros. Estimado lector, usted qué prefiere, que yo le diera $100 hoy o $100 en 3 años? Si prefiere $100 ahora, quiere decir que está descontando el dinero del futuro. Pero si le digo, $100 ahora o $1,000 en 3 años? Probablemente, dependiendo de su preferencia de tiempo, escogería los $1,000. Eso mismo es lo que hace el capitalista. El podría no invertir y consumir todo su capital en el presente. Pero no, él prefiere los $1,000 en el futuro, por eso invierte $100 en el presente. Bueno, eso es lo que han hecho por cientos de años millones y millones de empresarios, creando un capital enorme que es lo que nos permite generar riquezas. Es verdaderamente un milagro y un regalo de Dios.

En este sistema de producción mediante el capital, no veo ningún tipo de conflicto sino más bien ayuda, cooperación, desarrollo. El análisis marxista de la explotación no toma en cuenta ese financiamiento en el tiempo, ese puente económico entre el presente y el futuro tan esencial para la civilización como la conocemos. Lamentablemente la Iglesia Católica ha cometido un error garrafal en adoptar a Marx.

Errores de Economía de Dos Teólogos Católicos

2007-09-04T22:47:00.001-05:00

El problema con Chesterton y Belloc (y la gran mayoría de los intelectuales católicos de su época y de la nuestra actual) es que a pesar de que eran buenos teólogos, no sabían ni leyeron nada sobre economía. Ellos están en la misma línea de los Papas y la doctrina social de la iglesia que erróneamente sostiene que hay que oponerse al libre mercado porque hay que oponerse al liberalismo y al iluminismo.

La primicia del distributismo de Chesterton y Belloc es que la propiedad productiva tiene que estar dispersa en vez de concentrada. Desde el punto de vista económico, eso sería fatal. Veamos la industria de la computación personal…Qué sería de esa industria si el capital no estuviese concentrado en Microsoft e Intel y otros pocas compañías? Estaríamos pagando precios altísimos y probablemente la tecnología no se habría desarrollado. Ahora practicamente cualquier persona puede tener computadora. Si el capital estuviese distribuido equitativamente en vez de concentrado, esto sería más desastroso que el socialismo mismo.

Además, no se qué tiene de malo o inmoral que yo decida trabajar para una compañía grande en vez de tener una compañía pequeña. Me parece que la decisión debe ser del individuo quien tomaría en cuenta sus propias circunstancias.

Por otro lado, los distributistas consideran al “profit motive” inmoral. Es el mismo problema que tiene la doctrina social de la iglesia. Pero desde el punto de vista económico, sin el "profit motive" no puede haber precios de mercado, y sin los precios no hay economía sino caos, que es lo que paso en los países socialistas y lo que continuará pasando en Venezuela mientras más y más sectores estén dominados por el estado. Nos quedará el trueque, que sería volver a la barbarie...Los precios son el mecanismo mediante el cual la sociedad moderna distribuye para beneficio de todos los recursos. Al no haber precios, o al estos estar distorsionados, tienes colas, escasez en unos sectores, exceso de producción en otros, etc. En fin lo que es una economía socialista. El profit motive no quiere decir que uno es materialista o hedonista o que el dinero es más importante que Dios. Los católicos tenemos que safarnos de esa línea de pensamiento marxista de una vez por todas. Con los millones de muertos por la represión de Stalin, Castro, Mao y Pol Pot aprendimos unas cosas, pero con los otros millones que literalmente se murieron de hambre gracias al socialismo, esa lección de economía como que no la aprendimos.

Y por último tienes el problema de cómo implementar los ideales distributistas…pues mediante el estado y su aparato intervensionista y represivo, por supuesto, lo que indica una ingenuidad tan grande como la de los demócrata cristianos. Digan lo que digan en contra del Home Depot or Walmart o Microsoft o KMart, esos grandes conglomerados no son responsables de robarme el 40% de mi ingreso, que es lo que hace el estado democrático.

Los católicos y en especial los teólogos se deben leer a los escolásticos españoles que desarrollan las ideas de Santo Tomás. Pero como estos escribieron mucho antes que Adam Smith a favor del mercado, los distributistas y otros católicos anti-libre-empresa los ignoran. Dios mediante, espero que Benedicto XVI continúe la línea de Juan Pablo II en su Centesimus Annus en donde por primera vez un Papa reconoce la importancia del libre mercado, los precios, los empresarios y el “entrepreneurship”.

Part 3 Benedict’s 2nd Encyclical: Bigger Government?

2007-09-03T17:41:00.002-05:00

As indicated in my prior posts, Pope Benedict XVI is set to publish his second encyclical on the subject of economics. Among its themes, it is reported that the new encyclical will urge more regulation of world trade and economic systems and condemn tax evasion as “socially unjust.”

I argued earlier that if the above report is true, this future encyclical may represent a departure from the last social encyclical of Pope John Paul II, which seemed to open the way to a reconciliation between a market economy and Catholicism, and that it may represent a return to traditional Catholic Social Doctrine with its reliance on socialist economics, philosophy and propaganda. In this last part 3 of this series, I will argue that there may be an affinity between Pope Benedict’s writings on Christianity as a philosophy of freedom and the tradition of Liberalism as expressed by certain variants of the Enlightenment, specifically a connection to Saint Thomas and the late scholastic Spanish Dominicans and Jesuits of the School of Salamanca (Soto, Mercado, Molina, Mariana, etc.).

Several economists have already pointed out the strong philosophical connection between the development of the economic theory of free markets and Catholicism. To my knowledge, this was first explicitly developed by Murray Rothbard in the 1950’s.

In a memo written in 1957 titled "Catholicism, Protestantism and Capitalism," http://www.mises.org/rothbard/RothbardOnKauder3.pdf Rothbard is recommending to a publisher the work of Emil Kauder and his research into the Aristotelian-Thomistic background of marginal utility and Austrian economic theory:

Kauder, in fact, turns the Weber thesis on its own followers by attacking Smith and Ricardo for being influenced by [Protestantism] to develop the “labor theory of value.” Schumpeter also leaned in this direction. The brunt of this important new thesis is this: rather than saying that Hume and Smith developed economic theory almost de novo, economics had actually been developed, slowly but surely, over the centuries by the Scholastics and by Italian and French Catholics influenced by the Scholastics; that their economics was generally individualist methodologically, and stressed utility theory, consumers’ sovereignty and market pricing, and that Smith really set back economic thought by injecting the purely British doctrine of the labor theory of value, thus throwing economics off the sound track for a hundred years. Here I might add that the labor theory of value has had many bad consequences. It, of course, paved the way, quite logically, for Marx. Secondly, its emphasis on “costs determining prices” has encouraged the view that businessmen push up prices or that unions push up prices, rather than governmental inflation of the money supply. Third, its emphasis on “objective, inherent value” in goods led to “scientistic” attempts to measure values, to stabilize them by government manipulation, etc. Now, Kauder’s interesting thesis is in two parts: one, that the above was the historical course of events in economic thought; and two, that the reason for this forgetting of utility theory and replacement by a labor-cost theory was influence by the Protestant, as opposed to the Catholic spirit...
...We may sum up the Case for Catholicism as follows: (1) Smith’s laissez-faire and natural law views descended from the late Scholastics, and from the Catholic Physiocrats; (2) the Catholics had developed marginal utility, subjective value economics, and the idea that the just price was the market price, while the British Protestants grafted on a dangerous and ultimately highly statist labor theory of value, influenced by Calvinism; (3) some of the most “dogmatic” laissez-faire theorists have been Catholics: from the Physiocrats to Bastiat; (4) capitalism began in the Catholic Italian cities of the 14th century; (5) Natural rights and other rationalist views descended from the Scholastics.

This line of thought was fully developed by Murray Rothbard in his “Economic Thought Before Adam Smith” Volume 1.

A similar approach was explored by F.A. Hayek in his "Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice" University of Chicago Press 1978, note #15 to Chapter 9, p. 178-179. Here, Hayek states that the origin of capitalism is not to be found in Calvinism but in Jesuit Spanish scholastics and that these Jesuit scholars in the 16th century were the first to recognize that prices determined by just conduct of the parties in the market (no violence, fraud, etc.) is all that justice requires. Any particular application of "social justice" in the real world, including Catholic Social Doctrine, can only be accomplished via socialism.

Others who have explored the historical, philosophical and theological connection between Catholicism and Liberalism.

1) Bruno Leoni in ”Freedom and the Law”
2) Alejandro A. Chafuen in “Faith and Liberty, The Economic Thought of the Late Scholastics”
3) Jesús Huerta de Soto in “Juan de Mariana and the Spanish Scholastics” http://www.jesushuertadesoto.com/madre2.htm
4) Thomas E. Woods Jr. in “The Church and The Market”

All of these authors convincingly argue that the late scholastics had discovered and developed not only most of the basic tenets of the Liberal Anglo-Saxon movement, but also the principles of the free market economy, all from a Thomistic perspective.

If Kauder, Rothbard, and Hayek are correct, then Catholic economists, theologians and philosophers need to go back to the Catholic roots of Liberalism and extricate both Liberalism and Catholic Social Doctrine of the errors of Protestantism, Rationalism and the Enlightenment. And while Kauder, Rothbard, Hayek, Leoni, Chafuen and de Soto explore the historic and the philosophical connections between the two, to my knowledge, few have explored the deep theological connections between Catholicism and Liberalism. It is precisely here where Benedict XVI comes in, not only because he explicitly states, as I argue below, that this is needed, but because his own emphasis on the theology of freedom, he provides a possible bridge between a Catholic theology of freedom and free market economics.

1) My first area of exploration for possible affinities between Pope Benedict’s theology and Liberalism, is derived from a reading of his first encyclical “God is Love” http://www.vatican.va/holy_father/benedict_xvi/encyclicals/documents/hf_ben-xvi_enc_20051225_deus-caritas-est_en.html

b) Love—caritas—will always prove necessary, even in the most just society. There is no ordering of the State so just that it can eliminate the need for a
service of love. Whoever wants to eliminate love is preparing to eliminate man
as such. There will always be suffering which cries out for consolation and help. There will always be loneliness. There will always be situations of material need where help in the form of concrete love of neighbor is indispensable. The State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person—every person—needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need....In the end, the claim that just social
structures would make works of charity superfluous masks a materialist
conception of man...

This passage, at least implicitly, recognizes that it is precisely in a system of Liberalism which does not purport to have the state solve everyone’s problems. Liberalism leaves space open for voluntary associations as one of the mechanisms complementing the free market through which
Christians can actively participate and institutionalize love for one’s neighbors.

2) My second area of exploration comes from my reading of “Introduction to Christianity,” where Pope Benedict XVI, then Cardinal Ratzinger, fully develops the connection between creation and freedom. He starts by asserting that the Christian belief in God is not identical with either the materialistic conception of being (that everything we encounter is matter) nor with the idealistic conception of being (that what we encounter is ultimately the product of thought, where mind is the original reality) p. 156-157, 1990 edition, Ignatius Press:

Christian belief in God means that things are the being-thought of a creative consciousness, of a creative freedom, and that the creative consciousness that bears up all things has release what has been thought into the freedom of its own, independent existence.

This goes beyond idealism. For the idealist, everything that “is” is explained as being-thought by single consciousness. For the Christian, everything that is being-thought is sustained by a creative freedom that imbues what is with the freedom of its own being. (P.157). Therefore, creation itself must be understood as creative freedom.

The idea of freedom is the characteristic mark of the Christian believe in God as opposed to any kind of monism. At the beginning of all being it puts not just some kind of consciousness but a creative freedom that creates further freedoms…Christianity is a philosophy of freedom. For Christianity, the explanation of reality as a whole is not an all-embracing consciousness or a single materiality; on the contrary, at the summit stands a freedom that thinks and, but thinking, creates freedoms, thus making freedom the structural form of all being. (P. 157-158)

Pope Benedict then, after identifying the very structure of the world with freedom, goes on to state that Christians believe in the personal nature of the freedom that thinks. God is not an anonymous neutral consciousness but rather a person, therefore, (p. 158).

The highest is not the most universal but, precisely, the particular, and the Christian faith is thus above all also the option for man as the irreducible, infinity-oriented being. (p.158)

Pope Benedict further argues from this that a person is not just an individual, a reproduction of the world of ideas into matter, a secondary reality, like the Greeks thought, but, precisely, a person: a unique, irreproducible, particular, free created being who has supremacy over the universal. (P. 160).

The moral logic behind the right to private property, including ownership of our own bodies, arises from Christian tradition’s concept of the dignity of every single human being. Theologically, the concept of the dignity of the human being is partially derived from God’s creation, in which we are called to be inalienably responsible to God for our own use of liberty, but it is derived and confirmed in its entirety by the mystery of the Incarnation. God gives us the right to private property simply by restoring the fullness of the dignity we received when God created us. When God becomes man and gives himself back to the Father in an act of pure love, God redeems creation by giving us the opportunity to use our liberty to give ourselves to others.

The Pope traces the birth of freedom in his "Theology and the Church’s Political Stance" to Jesus Christ himself: “to Caesar what is Caesar’s and to God what is God’s”.

The modern idea of freedom is thus a legitimate product of the Christian environment; it could not have developed anywhere else. Indeed, one must add that it cannot be separated from this Christian environment and transplanted into any other system, as is shown very clearly today in the renaissance of Islam; the attempt to graft on to Islamic societies what are termed western standards cut loose from their Christian foundations misunderstands the internal logic of Islam as well as the historical logic to which these western standards belong, and hence this attempt was condemned to fail in this form. The construction of society in Islam is theocratic, and therefore monist and not dualist; dualism, which is the recondition for freedom, presupposes for its part the logic of the Christian thing. In practice this means that it is only where the duality of Church and state, of the sacral and the political authority, remains maintained in some form or another that the fundamental pre-condition exists for freedom. http://www.lewrockwell.com/orig6/ratzinger2.html

So the following logical steps from citations above can be used to secure the concept of freedom of Liberalism on more solid theological grounds.

a) Creation is the being-thought of a creative consciousness that is free
b) Creation is imbued by the freedom of its own being
c) Freedom is the structural form of all being
d) Christian God is personal
f) Human beings are not individuals but persons who are unique, irreproducible, particular, free, supreme over universals
g) Human dignity is partially derived from God’s creation, in which we are called to be inalienably responsible to God for our own use of liberty
h) Freedom in the West is a product of the dualism of State vs Church established by Christ's dictum "Give to Caesar what is Caesar’s, and to God what is God’s"

To my knowledge, however, Pope Benedict does not write anything related to what the above steps would mean for the world of politics and economics, the free market and freedom from state aggression and intervention. One can easily imbue these arguments with of Rothbard’s “Ethics of Liberty” http://www.mises.org/resources/b66a8bf2-9db3-428e-84d0-44ac1514873c to present a Catholic reading.

3) The third possible area of affinity between Pope Benedict XVI’s theology and Liberalism comes from his writings on the development of the concept of freedom since the Enlightenment.

In his essay “Truth-Tolerance-Freedom” he links the concept of freedom in the Enlightenment with Reason alone. He recognizes that this trend is varied and at times contradictory. He distinguishes two trends. One is the Anglo-Saxon trend which is based on natural law, rejects positive of man-made law, and recognizes that man has rights because he was created free. This approach is revolutionary because it stands against the absolutism of the state and because it is not merely a political claim but a metaphysical claim. “Inherent in being itself there is an ethical and legal claim.” (p. 238 of Truth and Tolerance, Ignatius Press, 2004). Being is not just material, it bears within it dignity and an ethical dimension that has a legal claim of nature against the existing institutions of government. These claims take the form of rights of individuals over and against the state and its institutions (p.239). And two is the more radical continental trends exemplified by Rousseau, the French Revolution, Marx and dictatorships they generated, which promised a freedom unregulated by anything. He concludes by stating that:

Since man is a being who exists in being-from, being-with and being-for, human freedom can only exist in an ordered coexistence of freedoms. Law is, therefore, not the opposite of freedom, but its necessary condition; it is indeed constitutive of freedom. (P.256)

Most modern Popes confused the Liberalism of the French Enlightenment (that was rationalistic, Cartesian, Rousseauian, Hegelian, Marxist, materialistic, contractual, utilitarian, anti-Semitic, atheistic, democratic and that led to the French Revolution, the Reign of Terror, democratic dictatorships of all sorts, communism, fascism, socialism and nazism) with the British tradition of common law (that was almost its exact opposite: anti-systematic, anti-utopian, empirical and Protestant).

To my knowledge, Pope Benedict is the first Pope to make this distinction between both movements explicit. Now, he does link through a cause and effect relationship both movements, with Anglo-Saxon Liberalism degenerating into French Liberalism, but the fact that he at least makes the distinction between them is critical, because from there, one can explore how Protestant philosophers who were well versed in the scholastics (Grotious and Pufendorf, for example) influenced the likes of Adam Smith. Unfortunately with the passage of time, the existence of this connection between Saint Thomas, the late Spanish scholastics and British common law was lost. This lost link contributed, I think, to the anti-liberal thinking of most modern Popes, who threw out the proverbial baby of Thomistic Liberalism with the bath water of Enlightenment Liberalism.

Both Enlightenment Liberalisms were dead ends that had and continue to have a very wide influence. The Liberalism articulated by Adam Smith, for example, gave us the mistaken labor theory of value that resulted in the development of the economics of Karl Marx, Keynes and Catholic Social Doctrine. As pointed out by Rothbard and Hayek, the late scholastics had discovered and developed not only most of the basic tenets of the Liberal Anglo-Saxon trends described by the Pope, but also the principles of the free market economy from a Thomistic perspective which can shield us from these mistakes. For example, they asserted that the value of a commodity is not based on its labor content, like Smith and Marx thought, but in the subjective valuations of buyers and sellers in a free market. Economists like Menger, Mises, Rothbard and Hayek took up these principles and fully developed into what is now called the Austrian School of Economics.

So this third area of affinity between Pope Benedict XVI’s theology and Liberalism is based on his explicit acknowledgement of a dichotomy between Natural Law Liberalism as expressed in the Anglo-Saxon tradition of Common Law and the French Enlightenment Liberalism. What is lacking in his perspective is a more elaborate connection to Saint Thomas and the Liberal Spanish Dominicans and Jesuits of the School of Salamanca. While one can take a leap and make the connection without, I believe, any major theological or philosophical problems, I am not sure if Benedict himself took that step.

4) A fourth area of affinity, however, is derived from his call to re-attach to the Enlightenment its Christian roots. By making this call, he does come close to making the connection between Liberalism and Saint Thomas. In "Christianity and the Crisis of Cultures" Ignatius Press 2006, he criticizes the banishment of Christianity from the European Constitution resulting from a “laicist Enlightenment” philosophy cut from its Christian roots.

…Enlightenment culture is substantially defined by the rights to liberty. Its starting point is that liberty is a fundamental value and the criterion of everything else…At the same time, it is equally obvious that the concept of liberty on which this culture is based inevitably leads to contradictions since it is either badly defined or not defined at all… p. 34-35-36

Above all, however, we must affirm that this Enlightenment philosophy, with its related culture, is incomplete. It consciously cuts off its own historical roots, depriving itself of the powerful sources from which it sprang. It detaches itself from what we might call the basic memory of mankind, without which reason loses its orientation… p 41

A tree without roots dries up…In affirming this, we are not denying all the positive and important contributions of this philosophy. Rather, we are stating that it needs to be completed, since it is profoundly incomplete…p. 43

Rothbard presents us with a very similar argument when he labors to find a philosophical and ethical foundation for the Austrian School of Economics on the Spanish Scholastics, Saint Thomas and Aristotle, in stark distinction to Mises utilitarian and value free approach. Here is Rothbard:

Thus, while praxeological economic theory is extremely useful for providing data
and knowledge for framing economic policy, it cannot be sufficient by itself to enable the economist to make any value pronouncements or to advocate any
public policy whatsoever. More specifically, Ludwig von Mises to the contrary notwithstanding, neither praxeological economics nor Mises’s utilitarian liberalism is sufficient to make the case for laissez faire and the free-market economy. To make such a case, one must go beyond economics and utilitarianism to establish an objective ethics which affirms the overriding value of liberty, and morally condemns all forms of statism... http://www.mises.org/resources/765d4a0d-02c8-4098-9862-823b7021d3b1

Pope Benedict’s argues that since the Enlightenment is Christian in origin, and that since it was only born in places where Christianity had taken hold (p.48), even if we cannot find the path of accepting the existence of God, we should at a minimum heed to Pascal’s advice and direct our lives as if God existed.

Even the one who does not succeed in finding the path to accepting the existence of God ought nevertheless to try to live and to direct his live as if God did indeed exist…This does not impose limitations on anyone’s freedom; it gives support to all our human affairs and supplies a criterion of which human life stands sorely in need. p. 51

In that fashion, one can reconnect the Enlightenment to its lost Christian roots, rebuilding and reinforcing the framework within which Western civilization developed.

Let me conclude by stating that Catholic economists and theologians must build a stronger connection between Catholicism and Capitalism, a connection that will prove more fruitful than the one between Protestantism and Capitalism that has given us, particularly through its Calvinist streak the type of socialism exemplified by the current US welfare state. F.A. Hayek, it is reported, influenced the development of John Paul II’s views of capitalism in Centesimus Annus.

11."During the last months of his life, Hayek had the opportunity for a long conversation with Pope John Paul II. There are signs of Hayek’s influence in certain portions of the pope’s encyclical Centesimus Annus. In paragraphs 31 and
32, in particular, Centesimus Annus employs unmistakably Hayekian insights."
Michael Novak, "Two Moral Ideas for Business," Economic Affairs
(September-October 1993): 7. (See Jesús Huerta de Soto, “The Ethics of
Capitalism” http://www.acton.org/publicat/m_and_m/1999_fall/desoto.html).

So perhaps the same dialogue will eventually take place between Pope Benedict and a Catholic economist or philosopher knowledgeable of both the Pope’s writings and the Thomistic roots of the Liberalism and make that final connection explicit.

Part 2 Benedict’s 2nd Encyclical: Bigger Government?

2007-09-02T15:15:00.001-05:00

As indicated below in Part 1, Pope Benedict XVI is set to publish his second encyclical on the subject of economics. Among its themes, it is reported that the new encyclical will urge more regulation of world trade and economic systems and condemn tax evasion as “socially unjust.”

I argued earlier that if the above report is true, this future encyclical may represent a departure from the last social encyclical of Pope John Paul II, which seemed to open the way to a reconciliation between a market economy and Catholicism. Here I will argue that this future encyclical may represent a return to traditional Catholic Social Doctrine (CSD) and its reliance on socialist economics, philosophy and propaganda.

It is my contention that the Popes not only attack certain aspects of capitalism that in their minds need to be confronted, but attack the very philosophical basis of capitalism, such as competition, individualism and the free market, and that in doing so, they helped pave the way for some of the worst experiments of economic interventionism of the 20th Century. All of this, at best, not knowing about the connection between Aristotle, Christianity, Saint Thomas, the late scholastics and capitalism, and at worst, ignoring it.

Let me start with a personal anecdote that perhaps some readers, maybe those coming from Latin America, may get. I went to a Jesuit high school in Venezuela during the late 70’s and early 80’s. The Jesuit priests took such an extreme view against capitalism that I recall attending retreats and “work camps” around the themes of “social reality” and poverty in which there was no attempt at a balanced critique both socialism and capitalism. Indeed they were so critical of individual competition that tennis was banned from the school as a “bourgeois” sport (they repainted the tennis courts we had and converted them into courts for “team” sports like volley-ball). Unfortunately, with that approach also went any recognition of individual intellectual achievements and grades. I never really questioned their approach until much later, but now I understand where these Jesuit priests came from. All you need is a detail reading of these Papal social encyclicals and letters. Sadly, by condemning capitalism with a greater force than socialism, Jesuits contributed to the handing over of Venezuela to a socialist dictator.

Pope Leo XIII’s Rerum Novarum

Let us read from Pope Leo XIII’s Rerum Novarum, written in 1891, the first of a series of social encyclicals and letters written by modern Popes. (http://www.vatican.va/holy_father/leo_xiii/encyclicals/documents/hf_l-xiii_enc_15051891_rerum-novarum_en.html)

3. In any case we clearly see, and on this there is general agreement, that some opportune remedy must be found quickly for the misery and wretchedness pressing so unjustly on the majority of the working class: for the ancient workingmen's guilds were abolished in the last century, and no other protective organization took their place. Public institutions and the laws set aside the ancient religion. Hence, by degrees it has come to pass that working men have been surrendered, isolated and helpless, to the hardheartedness of employers and the greed of unchecked competition. The mischief has been increased by rapacious usury, which, although more than once condemned by the Church, is nevertheless, under a different guise, but with like injustice, still practiced by covetous and grasping men. To this must be added that the hiring of labor and the conduct of trade are concentrated in the hands of comparatively few; so that a small number of very rich men have been able to lay upon the teeming masses of the laboring poor a yoke little better than that of slavery itself.

Leo XIII uses a stereotypical socialist language to criticize businessmen (hardheartedness, greedy, covetous, grasping, mischievous, rapacious, unjust, rich, slave-masters, monopolists, etc.) and to criticize competition (greed of unchecked competition). Marx and Engels couldn’t have written the encyclical any better! If in the first social encyclical the Catholic Church attacks capitalism with this ferocity, without understanding the role that competition and entrepreneurship play, without understanding how prices and markets work, without understanding the relationship between freedom and free markets, without understanding why the guild system and Mercantilism had to give way to a more productive economic system capable of feeding the masses, the Church writes-off Liberalism in the same pen stroke with which it writes-off socialism. (It is interesting to note that the Spanish and French translations of this encyclical use the term “proletariat” rather than “laboring poor.” How this Marxist term was introduced in those two translations is unknown to me since I was unable to figure out the original language in which Leo XIII wrote.)

Pope Pius XI’s Quadragesimo Anno

Pope Pius XI continues 40 years later in 1931 with this same line of argument in Quadragesimo Anno, equally attacking individualism and collectivism:

46. Accordingly, twin rocks of shipwreck must be carefully avoided. For, as one is wrecked upon, or comes close to, what is known as "individualism" by denying or minimizing the social and public character of the right of property, so by rejecting or minimizing the private and individual character of this same right, one inevitably runs into "collectivism" or at least closely approaches its tenets.

88. Attention must be given also to another matter that is closely connected with the foregoing. Just as the unity of human society cannot be founded on an opposition of classes, so also the right ordering of economic life cannot be left to a free competition of forces. For from this source, as from a poisoned spring, have originated and spread all the errors of individualist economic teaching. Destroying through forgetfulness or ignorance the social and moral character of economic life, it held that economic life must be considered and treated as altogether free from and independent of public authority, because in the market, i.e., in the free struggle of competitors, it would have a principle of self direction which governs it much more perfectly than would the intervention of any created intellect. But free competition, while justified and certainly useful provided it is kept within certain limits, clearly cannot direct economic life - a truth which the outcome of the application in practice of the tenets of this evil individualistic spirit has more than sufficiently demonstrated. Therefore, it is most necessary that economic life be again subjected to and governed by a true and effective directing principle. This function is one that the economic dictatorship which has recently displaced free competition can still less perform, since it is a headstrong power and a violent energy that, to benefit people, needs to be strongly curbed and wisely ruled. But it cannot curb and rule itself. Loftier and nobler principles - social justice and social charity - must, therefore, be sought whereby this dictatorship may be governed firmly and fully. Hence, the institutions themselves of peoples and, particularly those of all social life, ought to be penetrated with this justice, and it is most necessary that it be truly effective, that is, establish a juridical and social order which will, as it were, give form and shape to all economic life. Social charity, moreover, ought to be as the soul of this order, an order which public authority ought to be ever ready effectively to protect and defend. It will be able to do this the more easily as it rids itself of those burdens which, as We have stated above, are not properly its own.

Such an approach was tried by the Christian Democracy movements in Latin America, which were tried and failed miserably: to establish and economic order based on charity and social justice, guided by the state. But why does the Pope insist in denying the fact that competition CAN direct economic life? This is just like denying the fact that competition in the natural world CAN direct evolution, without the need for a guiding hand! If the Church has finally rectified its mistake regarding Galileo and now recognizes that gravity, along with electromagnetic weak, strong and other natural forces, can give order the universe and if it clearly accepts evolution as a plausible theory that can order the natural world as long as it does not deny God, why deny that competition can direct economic life. Free markets, gravity and evolution don’t necessarily deny the existence of God nor God’s active participation in the world. Perhaps this is a point that needs to be explored in more detail, since I sense that this is the key Papal misunderstanding regarding Liberalism, more than the issue of Freedom as a supreme value that you pointed out earlier. Creationism is to Evolution what Catholic Social Doctrine is to Free Markets.

In the following section, the Pope Pius XI attacks “capital:”

54. Property, that is, "capital," has undoubtedly long been able to appropriate too much to itself. Whatever was produced, whatever returns accrued, capital claimed for itself, hardly leaving to the worker enough to restore and renew his strength. For the doctrine was preached that all accumulation of capital falls by an absolutely insuperable economic law to the rich, and that by the same law the workers are given over and bound to perpetual want, to the scantiest of livelihoods. It is true, indeed, that things have not always and everywhere corresponded with this sort of teaching of the so-called Manchesterian Liberals; yet it cannot be denied that economic social institutions have moved steadily in that direction. That these false ideas, these erroneous suppositions, have been vigorously assailed, and not by those alone who through them were being deprived of their innate right to obtain better conditions, will surprise no one.

But how does Pius XI conclude that capital does not leave enough to the workers? Clearly he has borrowed from Karl Marx who wrote Das Kapital to unsuccessfully attempt to prove the same. I don’t think the Pope truly understood the essential function of capital and capital markets in a free economy. First off, this contraposition between capital and labor is artificial and a result, once again, of Marx and his labor theory of value. There is no way that the Pope could have invented that dichotomy between capital and labor without explicitly appropriating it from Marx. The notion that somehow the capitalist extracts the “added value” of labor (surplus value in Marxian terminology) from the workers and pockets it to unjustly enrich himself is mistaken and caused great damage to the hundreds of million of people who endured under all types of socialism during the 20th century and to the 100 million who perished as a result. By borrowing it, even unconsciously, Pius XI contributed to that tragedy.

If any of the readers are businessmen, you can attest that from a practical everyday perspective, very few if any businessmen operate with that dichotomy in mind. Both capital and labor must work hand in hand. Without labor, capital is useless. As a hospital administrator, I work hard to retain, train, and satisfy my employees. I am evaluated and compensated based on the level of satisfaction and the turnover rate of my employees. I spend 80% of my time dealing with labor issues. If I didn’t, I could not retain good employees and all the capital in the world would mean nothing. Second, who owns the capital markets? Pension and mutual funds. Who owns these funds in capitalist countries? The great majority owned by workers. Who owns these funds in countries that have followed socialism? The state. Third, the capacity of human intelligence to take something like capital that is pure potency waiting to be unlocked and then to transform it into products and services for everyone is, in my opinion, a beautiful gift from God. Regarding the function of the stock, options, futures and bond markets, I will not go into detail, other than to say that they are essential to the diversification of risk and the promotion of sound economic growth.

The Pope does recognize that the situation of the working poor has improved:

59. The redemption of the non-owning workers - this is the goal that Our Predecessor declared must necessarily be sought. …And these commands have not lost their force and wisdom for our time because that "pauperism" which Leo XIII beheld in all its horror is less widespread. Certainly the condition of the workers has been improved and made more equitable especially in the more civilized and wealthy countries where the workers can no longer be considered universally overwhelmed with misery and lacking the necessities of life. But since manufacturing and industry have so rapidly pervaded and occupied countless regions, not only in the countries called new, but also in the realms of the Far East that have been civilized from antiquity, the number of the non-owning working poor has increased enormously and their groans cry to God from the earth. Added to them is the huge army of rural wage workers, pushed to the lowest level of existence and deprived of all hope of ever acquiring "some property in land,"and, therefore, permanently bound to the status of non-owning worker unless suitable and effective remedies are applied.

But Pius XI never bothers to asks himself how and why the situation of the working class in the wealthier countries improved!!! Could it be because of free markets?

This is the same perplexity that Catholic French philosopher Jacques Maritain expresses in “Reflections on America.” http://www2.nd.edu/Departments/Maritain/etext/reflect0.html. This is a great little book, a sort of follow up to de Tocqueville. Maritain was responsible for the revival of Aquinas in the 20th Century. He taught at Notre Dame in the 50’s.

Here’s the quote from Maritain:

I would like to submit an especially significant example of the need for an explicit philosophy, an example drawn from the achievements and discoveries of this country in the social field. I am thinking of a phenomenon of great historical importance -- the striking success of the "unsystematic American system": namely, the transformation of the economic system which has come about in this country during the last half century. The industrial regime inherited from Europe has now become unrecognizable in this country. It has been superseded by new economic structures which are still in the making, and in a state of fluidity, but which render both capitalism and socialism things of the past. Free enterprise and private ownership function now in a social context and a general mood entirely different from those of the nineteenth century. Two developments of outstanding significance must be mentioned in this connection: first, the growth of organized labor; second, the evolution of industry and management.

Maritain here recognizes that there is something different and unique about American free markets. What he calls the “unsystematic American System” is simply Liberalism at its best. That is because continental Europe never really experienced true Liberalism and by the time Maritain and others could have studied England, that country was already in the midst of socialist policies and institutions, just like the rest of Europe. I think Pope John Paul adopted the perspective of distinguishing between 19th Century capitalism and modern capitalism.

Reading other sections of Pope Pius XI’s Quadragesimo Anno sent chills down my spine. I am referring to the open and enthusiastic embrace of fascism, ambivalence about socialism and appropriation of Lenin’s account of imperialism.

I bolded the key phrases, but all the sections are worth reading. All are cut and pasted directly from the official documents posted on the Vatican website. Can someone please tell me that the Vatican website was hacked by fascists and socialists?

FASCISM and Pope Pius XI:

82. The social policy of the State, therefore, must devote itself to the re-establishment of the Industries and Professions. In actual fact, human society now, for the reason that it is founded on classes with divergent aims and hence opposed to one another and therefore inclined to enmity and strife, continues to be in a violent condition and is unstable and uncertain.

83. Labor, as Our Predecessor explained well in his Encyclical is not a mere commodity. On the contrary, the worker's human dignity in it must be recognized. It therefore cannot be bought and sold like a commodity. Nevertheless, as the situation now stands, hiring and offering for hire in the so-called labor market separate men into two divisions, as into battle lines, and the contest between these divisions turns the labor market itself almost into a battlefield where, face to face, the opposing lines struggle bitterly. Everyone understands that this grave evil which is plunging all human society to destruction must be remedied as soon as possible. But complete cure will not come until this opposition has been abolished and well-ordered members of the social body - Industries and Professions - are constituted in which men may have their place, not according to the position each has in the labor market but according to the respective social functions which each performs. For under nature's guidance it comes to pass that just as those who are joined together by nearness of habitation establish towns, so those who follow the same industry or profession - whether in the economic or other field - form guilds or associations, so that many are wont to consider these self-governing organizations, if not essential, at least natural to civil society.

84. Because order, as St. Thomas well explains, is unity arising from the harmonious arrangement of many objects, a true, genuine social order demands that the various members of a society be united together by some strong bond. This unifying force is present not only in the producing of goods or the rendering of services - in which the employers and employees of an identical Industry or Profession collaborate jointly - but also in that common good, to achieve which all Industries and Professions together ought, each to the best of its ability, to cooperate amicably. And this unity will be the stronger and more effective, the more faithfully individuals and the Industries and Professions themselves strive to do their work and excel in it.

85. It is easily deduced from what has been said that the interests common to the whole Industry or Profession should hold first place in these guilds. The most important among these interests is to promote the cooperation in the highest degree of each industry and profession for the sake of the common good of the country. Concerning matters, however, in which particular points, involving advantage or detriment to employers or workers, may require special care and protection, the two parties, when these cases arise, can deliberate separately or as the situation requires reach a decision separately.

91. Recently, as all know, there has been inaugurated a special system of syndicates and corporations of the various callings which in view of the theme of this Encyclical it would seem necessary to describe here briefly and comment upon appropriately.

92. The civil authority itself constitutes the syndicate as a juridical personality in such a manner as to confer on it simultaneously a certain monopoly-privilege, since only such a syndicate, when thus approved, can maintain the rights (according to the type of syndicate) of workers or employers, and since it alone can arrange for the placement of labor and conclude so-termed labor agreements. Anyone is free to join a syndicate or not, and only within these limits can this kind of syndicate be called free; for syndical dues and special assessments are exacted of absolutely all members of every specified calling or profession, whether they are workers or employers; likewise all are bound by the labor agreements made by the legally recognized syndicate. Nevertheless, it has been officially stated that this legally recognized syndicate does not prevent the existence, without legal status, however, of other associations made up of persons following the same calling.

93. The associations, or corporations, are composed of delegates from the two syndicates (that is, of workers and employers) respectively of the same industry or profession and, as true and proper organs and institutions of the State, they direct the syndicates and coordinate their activities in matters of common interest toward one and the same end.

94. Strikes and lock-outs are forbidden; if the parties cannot settle their dispute, public authority intervenes.

95. Anyone who gives even slight attention to the matter will easily see what are the obvious advantages in the system We have thus summarily described: The various classes work together peacefully, socialist organizations and their activities are repressed, and a special magistracy exercises a governing authority. Yet lest We neglect anything in a matter of such great importance and that all points treated may be properly connected with the more general principles which We mentioned above and with those which We intend shortly to add, We are compelled to say that to Our certain knowledge there are not wanting some who fear that the State, instead of confining itself as it ought to the furnishing of necessary and adequate assistance, is substituting itself for free activity; that the new syndical and corporative order savors too much of an involved and political system of administration; and that (in spite of those more general advantages mentioned above, which are of course fully admitted) it rather serves particular political ends than leads to the reconstruction and promotion of a better social order.

133. Strict and watchful moral restraint enforced vigorously by governmental authority could have banished these enormous evils and even forestalled them; this restraint, however, has too often been sadly lacking. For since the seeds of a new form of economy were bursting forth just when the principles of rationalism had been implanted and rooted in many minds, there quickly developed a body of economic teaching far removed from the true moral law, and, as a result, completely free rein was given to human passions.

LENINISM and Pope Pius XI:

108. This accumulation of might and of power generates in turn three kinds of conflict. First, there is the struggle for economic supremacy itself; then there is the bitter fight to gain supremacy over the State in order to use in economic struggles its resources and authority; finally there is conflict between States themselves, not only because countries employ their power and shape their policies to promote every economic advantage of their citizens, but also because they seek to decide political controversies that arise among nations through the use of their economic supremacy and strength
.
109. The ultimate consequences of the individualist spirit in economic life are those which you yourselves, Venerable Brethren and Beloved Children, see and deplore: Free competition has destroyed itself; economic dictatorship has supplanted the free market; unbridled ambition for power has likewise succeeded greed for gain; all economic life has become tragically hard, inexorable, and cruel. To these are to be added the grave evils that have resulted from an intermingling and shameful confusion of the functions and duties of public authority with those of the economic sphere - such as, one of the worst, the virtual degradation of the majesty of the State, which although it ought to sit on high like a queen and supreme arbitress, free from all partiality and intent upon the one common good and justice, is become a slave, surrendered and delivered to the passions and greed of men. And as to international relations, two different streams have issued from the one fountain-head: On the one hand, economic nationalism or even economic imperialism; on the other, a no less deadly and accursed internationalism of finance or international imperialism whose country is where profit is.

SOCIALISM and Pope Pius XI:

113. The other section, which has kept the name Socialism, is surely more moderate. It not only professes the rejection of violence but modifies and tempers to some degree, if it does not reject entirely, the class struggle and the abolition of private ownership. One might say that, terrified by its own principles and by the conclusions drawn there from by Communism, Socialism inclines toward and in a certain measure approaches the truths which Christian tradition has always held sacred; for it cannot be denied that its demands at times come very near those that Christian reformers of society justly insist upon.

114. For if the class struggle abstains from enmities and mutual hatred, it gradually changes into an honest discussion of differences founded on a desire for justice, and if this is not that blessed social peace which we all seek, it can and ought to be the point of departure from which to move forward to the mutual cooperation of the Industries and Professions. So also the war declared on private ownership, more and more abated, is being so restricted that now, finally, not the possession itself of the means of production is attacked but rather a kind of sovereignty over society which ownership has, contrary to all right, seized and usurped. For such sovereignty belongs in reality not to owners but to the public authority. If the foregoing happens, it can come even to the point that imperceptibly these ideas of the more moderate socialism will no longer differ from the desires and demands of those who are striving to remold human society on the basis of Christian principles. For certain kinds of property, it is rightly contended, ought to be reserved to the State since they carry with them a dominating power so great that cannot without danger to the general welfare be entrusted to private individuals.

115. Such just demands and desire have nothing in them now which is inconsistent with Christian truth, and much less are they special to Socialism. Those who work solely toward such ends have, therefore, no reason to become socialists.

Pius XI does state that ultimately Christian Socialism is impossible (apparently Christian fascism was OK), but one can see how Christian Democrats and other Catholics in the West read Quadragesimo Anno and concluded that they could use all the socialist and fascist economic analysis and techniques and feel that they were following Catholic Orthodoxy.

Pope Paul VI’s Octogesima Adveniens

Let us go back now to the development of Catholic Social Doctrine. The attacks against the basis of capitalism continue 40 years later in 1971with the apostolic letter Octogesima Adveniens, 80 years after Rerum Novarum (http://www.vatican.va/holy_father/paul_vi/apost_letters/documents/hf_p-vi_apl_19710514_octogesima-adveniens_en.html).

Here Pope Paul VI condemns Liberalism because it has an individualistic basis:

35. On another side, we are witnessing a renewal of the liberal ideology. This current asserts itself both in the name of economic efficiency, and for the defense of the individual against the increasingly overwhelming hold of organizations, and as a reaction against the totalitarian tendencies of political powers. Certainly, personal initiative must be maintained and developed. But do not Christians who take this path tend to idealize liberalism in their turn, making it a proclamation in favor of freedom? They would like a new model, more adapted to present-day conditions, while easily forgetting that at the very root of philosophical liberalism is an erroneous affirmation of the autonomy of the individual in his activity, his motivation and the exercise of his liberty…

Pope Paul VI is wrong in assuming that Liberalism is based on the autonomy of an individual’s activity, motivation and liberty. That is NOT what Maritain saw in America. And it is NOT what I see, live and practice as a businessman. This is the tragedy: by attacking Socialism and Liberalism and advocating a “third way,” Catholicism misses the opportunity to understand the science of economics (and its relationship to freedom and faith), and ends up accepting, recommending and advocating economic policies and management practices that are a carbon copy of Marxism and Socialism. If Catholicism has little positive to say about the free market, competition, individualism, discipline, work-ethic, etc, all necessary to create wealth, one is left with the Utopia of a “new man” preached by Marxists and Liberation Theology alike. Indeed that is what happened for a period of time in the 60’s, 70’s and 80’s when Catholics erroneously promoted variations of Liberation Theology. The Latin American Bishop’s documents of Medellín and Puebla are full of Liberation Theology. So are other documents from American Bishops that address economics and international trade. It is what I was taught by Jesuits in the 70’s when I went to high school, and it is what I was taught at Notre Dame’s Economics and Theology Departments in the 80’s (Wilbur, Jameson, Goulet, McBrian, and most visiting faculty brought by the Kellogg Institute from Latin America, with very few notable exceptions).

Clearly, the Popes do not understand economic theory. Let us take the example of a “just wage.” When the Popes say that a just wage should allow a family to live comfortably, how do they think that this can be enforced from the top and without taking the reality of scarcity into consideration? Why assume that the state's intervention legislating wages is purely benign? Why assume that this enforcement will not hurt others who will be priced out of the market and go unemployed? Why are the moral implications of supporting policies that cause unemployment never addressed? The Popes just assume that wages are set by arbitrary decisions that employers make. Where does the underlying criticisms that the market is unfair and arbitrary come from? Surely, every now and then an employer can give an extra bonus or be generous with a pay increase beyond what the dynamics of the market call for, but do the Popes really think that all employers can permanently pay people at whatever level some third party determines is "reasonable"? You cannot suspend the laws of economics. If the Popes believe that the concepts of marginal cost, marginal productivity and marginal utility are wrong, then they should appeal to reason to disprove them. If not, they should remain cautions about pronouncements in economic matters, with the same caution as they have traditionally taken with respects to science ever since the conflict with Galileo.

John Paul II, as I mentioned in Part 1, changed all of this and in the process of writing his last social encyclical, opened a door that theologians, economists and philosophers must explore: can Catholicism and the free market co-exists and are there historical and theological cause and effect links between the evolution of free markets, Catholicism and the Church. As a fervent Catholic, it is my hope and prayer to Mary that Pope Benedict XVI will follow the example of John Paul II.

In Part 3 of this series, I will attempt to show that one can find certain affinities between Pope Benedict’s theological writings on Christianity as a philosophy of freedom and a free market economy based on private property, freedom of exchange and minimal or no state intervention.

For a more in depth studies of Catholic Social Doctrine and the free market see:

1) Thomas E. Woods Jr, "The Church and the Market". For a review of the book, go to: http://www.mises.org/journals/qjae/pdf/qjae8_4_8.pdf

2) Michael Novak, "The Spirit of Democratic Capitalism"

Part 1 Benedict’s 2nd Encyclical: bigger government?

2007-09-02T12:40:00.001-05:00

As reported on http://www.catholic.org/international/international_story.php?id=25018, Pope Benedict XVI is set to publish his second encyclical on the subject of economics. Among its themes, it is reported that the new encyclical will urge more regulation of world trade and economic systems and condemn tax evasion as “socially unjust.”

If the above report is true, it will be tragic. In these first few articles, I will argue that this future encyclical may represent:

1) A departure from the last social encyclical of Pope John Paul II, which seemed to open the way to a reconciliation between a market economy, Liberalism and Catholicism
2) A return to traditional Catholic Social Doctrine, which I contend is polluted with socialist economics, philosophy and propaganda.
3) A missed opportunity for Pope Benedict to synthesize the connection between his writings on Christianity as a philosophy of freedom and a free market economy based solely on private property, freedom of exchange and no state intervention.

Pope John Paul II, Free Market Economy and Liberalism

Writing in Centesimus Annus (http://www.vatican.va/edocs/ENG0214/_INDEX.HTM), John Paul II tackled the question of the role of capitalism after the failure of communism. Paragraph 42 reads as follows:

“Returning now to the initial question: can it perhaps be said that, after the failure of Communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this the model which ought to be proposed to the countries of the Third World which are searching for the path to true economic and civil progress? The answer is obviously complex. If by "capitalism" is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative…”

Obviously, in answering the question in the affirmative, John Paul II reflects on other critical principles that are clearly compatible with a market economy:

1) Establishes both "freedom" and "original sin" as essential in understanding of how human reality works. When we ignore this, we make matters worse.

"Man tends towards good, but he is also capable of evil. He can transcend his immediate interest and still remain bound to it. The social order will be all the more stable, the more it takes this fact into account and does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony. In fact, where self-interest is violently suppressed, it is replaced by a burdensome system of bureaucratic control which dries up the wellsprings of initiative and creativity. When people think they possess the secret of a perfect social organization which makes evil impossible, they also think that they can use any means, including violence and deceit, in order to bring that organization into being. Politics then becomes a "secular religion" which operates under the illusion of creating paradise in this world."

2) Places the role of the state in its proper place of guaranteeing individual freedom and private property.

"48. These general observations also apply to the role of the State in the economic sector. Economic activity, especially the activity of a market economy, cannot be conducted in an institutional, juridical or political vacuum. On the contrary, it presupposes sure guarantees of individual freedom and private property, as well as a stable currency and efficient public services. Hence the principle task of the State is to guarantee this security, so that those who work and produce can enjoy the fruits of their labors and thus feel encouraged to work efficiently and honestly."

3) Places individuals, groups and associations (and not the state) in the primary role of overseeing human rights in the economy.

"Another task of the State is that of overseeing and directing the exercise of human rights in the economic sector. However, primary responsibility in this area belongs not to the State but to individuals and to the various groups and associations which make up society. The State could not directly ensure the right to work for all its citizens unless it controlled every aspect of economic life and restricted the free initiative of individuals."

4) Re-interprets the principle of subsidiarity, asserting that it limits the role of the state even when it has to intervene in cases of emergency or market failures.

"The State has the further right to intervene when particular monopolies create delays or obstacles to development. In addition to the tasks of harmonizing and guiding development, in exceptional circumstances the State can also exercise a substitute function, when social sectors or business systems are too weak or are just getting under way, and are not equal to the task at hand. Such supplementary interventions, which are justified by urgent reasons touching the common good, must be as brief as possible, so as to avoid removing permanently from society and business systems the functions which are properly theirs, and so as to avoid enlarging excessively the sphere of State intervention to the detriment of both economic and civil freedom."

5) Criticizes the role of the welfare state and places responsibility for welfare on the hands of "neighbors," individuals and associations.

"By intervening directly and depriving society of its responsibility, the Social Assistance State leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic ways of thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending. In fact, it would appear that needs are best understood and satisfied by people who are closest to them and who act as neighbors to those in need."

6) Recognizes the universal social dimension of labor markets, individual initiative and entrepreneurship.

"Mention has just been made of the fact that people work with each other, sharing in a "community of work" which embraces ever widening circles. A person who produces something other than for his own use generally does so in order that others may use it after they have paid a just price, mutually agreed upon through free bargaining. It is precisely the ability to foresee both the needs of others and the combinations of productive factors most adapted to satisfying those needs that constitutes another important source of wealth in modern society. Besides, many goods cannot be adequately produced through the work of an isolated individual; they require the cooperation of many people in working towards a common goal. Organizing such a productive effort, planning its duration in time, making sure that it corresponds in a positive way to the demands which it must satisfy, and taking the necessary risks — all this too is a source of wealth in today's society. In this way, the role of disciplined and creative human work and, as an essential part of that work, initiative and entrepreneurial ability becomes increasingly evident and decisive."

7) Recognizes the primacy of the free market as the most efficient and effective

"It would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs."

8) Acknowledges the proper role of profit and points out how critical human capital is to the firm.

"The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied. But profitability is not the only indicator of a firm's condition. It is possible for the financial accounts to be in order, and yet for the people — who make up the firm's most valuable asset — to be humiliated and their dignity offended. Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency. In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavoring to satisfy their basic needs, and who form a particular group at the service of the whole of society. Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business."

9) Recognizes the importance of religious values in capitalism and that one cannot have capitalism without freedom in other realms, not just economic (i.e., what the Chinese are trying to do...).

"If economic life is absolutized, if the production and consumption of goods become the center of social life and society's only value, not subject to any other value, the reason is to be found not so much in the economic system itself as in the fact that the entire socio-cultural system, by ignoring the ethical and religious dimension, has been weakened, and ends by limiting itself to the production of goods and services alone. All of this can be summed up by repeating once more that economic freedom is only one element of human freedom. When it becomes autonomous, when man is seen more as a producer or consumer of goods than as a subject who produces and consumes in order to live, then economic freedom loses its necessary relationship to the human person and ends up by alienating and oppressing him."

10) Derives private property rights from its labor theory, in a similar fashion as John Locke and other champions of liberalism do:

a. Here's JPII: "Man fulfils himself by using his intelligence and freedom. In so doing he utilizes the things of this world as objects and instruments and makes them his own. The foundation of the right to private initiative and ownership is to be found in this activity."

b. Here's Locke: "Sec. 27. Though the Earth, and all inferior Creatures be common to all Men, yet every Man has a Property in his own Person. This no Body had any Right to but himself. The Labor of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labor with, and joined to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, it hath by this labor something annexed to it, that excludes the common right of other Men. For this Labor being the unquestionable Property of the Laborer, no Man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others."

11) Declares as illegitimate private property that is left idle, in a similar fashion as John Locke does:

a. Here's JPII: "It becomes illegitimate, however, when it is not utilized or when it serves to impede the work of others, in an effort to gain a profit which is not the result of the overall expansion of work and the wealth of society, but rather is the result of curbing them or of illicit exploitation, speculation or the breaking of solidarity among working people. Ownership of this kind has no justification, and represents an abuse in the sight of God and man."

b. Here's Locke: "...yet there are still great Tracts of Ground to be found, which (the Inhabitants thereof not having joyned with the rest of Mankind, in the consent of the Use of their common Money) lie waste, and are more than the People, who dwell on it, do, or can make use of, and so still lie in common."

12) Supports the universal destination of goods, just like John Locke does:

a. Here’s JPII: “In Rerum novarum, Leo XIII strongly affirmed the natural character of the right to private property, using various arguments against the socialism of his time. This right, which is fundamental for the autonomy and development of the person, has always been defended by the Church up to our own day. At the same time, the Church teaches that the possession of material goods is not an absolute right, and that its limits are inscribed in its very nature as a human right. While the Pope proclaimed the right to private ownership, he affirmed with equal clarity that the "use" of goods, while marked by freedom, is subordinated to their original common destination as created goods, as well as to the will of Jesus Christ as expressed in the Gospel. Pope Leo wrote: "those whom fortune favors are admonished ... that they should tremble at the warnings of Jesus Christ ... and that a most strict account must be given to the Supreme Judge for the use of all they possess"; and quoting Saint Thomas Aquinas, he added: "But if the question be asked, how must one's possessions be used? the Church replies without hesitation that man should not consider his material possessions as his own, but as common to all...", because "above the laws and judgments of men stands the law, the judgment of Christ

b. Here's Locke, admitting that God gave the world to all "men in common": "Sec. 39. And thus, without supposing any private Dominion, and property in Adam, over all the World, exclusive of other Men, which can no way be proved, nor any ones Property be made out from it; but supposing the World given as it was to the Children of Men in common, we see how labour could make Men distinct titles to several parcels of it, for their private uses; wherein there could be no doubt of Right, no room for quarrel.

c. Here's Locke saying that the same Natural Law that gives us the right to private property also bounds us to share what duly belongs to others when we own more than we need: "30. It will, perhaps, be objected to this, that if gathering the acorns or other fruits of the earth, etc., makes a right to them, then any one may engross as much as he will. To which I answer, Not so. The same law of Nature that does by this means give us property, does also bound that property too. "God has given us all things richly." Is the voice of reason confirmed by inspiration? But how far has He given it us- "to enjoy"? As much as any one can make use of to any advantage of life before it spoils, so much he may by his labor fix a property in. Whatever is beyond this is more than his share, and belongs to others."

d. And here's Locke saying that private property is also bound by the rights of others who are not left with enough: "For this "labor" being the unquestionable property of the laborer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others."

Clearly, John Paul’s thinking evolved from his first social encyclical, Laborems Exercens, where he offered sound criticisms of socialism and communism, but biased against capitalism. All modern Popes before him offered the same approach. If Pope Benedict indeed is considering a return to traditional Catholic Social Doctrine of more state intervention in economics, it will be a huge step backwards and a blow to the many who are attempting not only to reconcile Catholicism to free markets, but indeed to prove and establish historical and theological cause and effect links between the evolution of free markets, Catholicism and the Church.

In Part 2 of this series, I will offer a critical review of key Papal social encyclicals to demonstrate how Catholic Social Doctrine is influenced by socialist economics, philosophy and propaganda.