Government Efficiency - Scott Adam's Blog

Government Efficiency

I was reading a debate on healthcare in the recent Newsweek. The prominent Democrat supported some sort of national healthcare while the prominent Republican supported more of a free market approach. Most people will probably take sides based on their assumptions about government efficiency versus market efficiency.

An old joke that works as its own punch line goes “I’m from the government and I’m here to help.” Most people in this country reflexively believe the government will screw up anything it touches. There’s plenty of evidence for that view.

But I wonder if government can be more efficient than the free market in specific situations, specifically in situations where the service is more about software than headcount, and where nothing needs to be invented.

Imagine a situation where you are deciding if a particular service should be handled by the government or by a hypothetical free market dominated by three players. The government’s incentive is to provide the service as cheaply as it can. Any company’s incentive is to transfer the greatest amount of money from consumers to stockholders. And to do that in a competitive industry you usually end up with what I call confusopolies. A confusopoly is a situation in which companies pretend to compete on price, service, and features but in fact they are just trying to confuse customers so no one can do comparison shopping.

Cell phone companies are the best example of confusopolies. The average consumer finds it impossible to decipher which carrier has the best deal, so carriers don’t have normal market pressure to lower prices. It’s a virtual cartel without the illegal part.

The advantage of a free market system is innovation. The market has an incentive to try new things. Governments prefer to avoid risks. If you need innovation, you want the free market.

In the case of national healthcare insurance, I ask myself these questions:

  1. Is it more about software than headcount?
  2. How important is innovation?
  3. Is the free market for this service a natural confusopoly?

Before you call me a socialist, I don’t have an informed opinion on national healthcare. But I also don’t have an automatic bias in favor of a free market that gave us Enron, WorldCom, Madoff, derivatives, and mortgages to hobos. I think you have to look at the specifics.