Your inefficiency is my profit

February 03, 2021

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

It's remarkable that Adam Smith was writing in the 1770s, some 250 years ago; the quote above is from An Inquiry into the Nature and Causes of the Wealth of Nations. And it's as true now as it was then.

If you want to understand why healthcare is so expensive, why Illinois is teetering on the edge of fiscal ruin, or why housing is so unaffordable in the Bay Area, that quote will get you pretty far. The issue is competition, and regulatory capture.

Right-thinking individuals never want to hurt others; they just want what's best for themselves. And even their clients.

Medicine has a long history of quackery—miracle cures, bloodletting, all kinds of crazy stuff. Perhaps it made sense at the time. But as science advanced, it became clear that some things worked, and others didn't. And so today, every facet of healthcare is regulated—who can practice, what they can charge, whether drugs can be sold, and to whom, even whether hospitals can be built, and what equipment they can contain.

As this thicket of regulation developed, by politicians with input from the doctors, drug companies, and insurers, they made sure to get a seat at the table. Until what emerged, year by year, compromise after compromise, was something everyone could live with; the output of a political process that let politicians "get something done", ostensibly for the benefit of their constituents, that the regulated parties could live with.

That the regulated parties could live with—that's the rub. Competition—the bane of the successful. When you've made it, sales are up and to the right, and politicians are calling on you, asking your input on major legislation, there's only one direction you can go: down. Who wants that?

So the predictable result is that competition suffers. Not because anyone wanted to kill it, it just wasn't a priority—we decided we wanted other things more.

Nobody says "I want to be fat", they'd just rather eat dessert every night, than carefully watch their weight.

Nobody says "I don't want competition", they just enact rules like:

  • State-by-state occupational licensing. Why hire a $350/hr lawyer in California when you can get one who knows the law just as well for half the cost in Nevada, or even Mexico or India? Does orthopedics, dentistry, massage therapy, or psychiatry work differently one state over? But: who's going to make it "their thing" to make it possible?
  • A drug safety process that takes a decade, costs billions of dollars, and ensures the only route to market runs through gatekeepers such as Pfizer, Merck, or Genentech, who get a cut of the action
  • Banking regulation that have led to—count them—five new banks in the United States from 2013 to 2017. Five!
  • Want to open a new hospital? Many states have lengthy review processes—sometimes they even tell you you can't close.
  • Charter school bans, ensuring everyone, not just the poor, can experience terrible, one-size-fits-all solutions that would make Soviet bureaucrats happy

I don't know how to ensure regulatory processes maintain, or increase, competition. But I do know that, if you give business a seat at the table, they're going to do what's best for them—not necessarily consumers, and definitely not competitors, especially the most deadly and innovative ones out there—the ones that don't yet exist.

I think this is why, in my heart, I still lean toward small-government libertarianism. It's not perfect, but the surface for regulatory capture seems smaller. A compromise might be making every rule expire in some fixed period of time—if it's still relevant, we can renew it when it comes up.

Tepper and Hearn wrote a book on this topic. Early signs are that the Biden Administration is going to be tougher on antitrust; that's at least a sign they acknowledge that concentration is a problem, which is promising.

Two other things I've realized thinking about competition and regulation:

  • I used to be suspicious of the conceot of "systemic racism". As I thought about it, I realized competition is basically its economic equivalent: something possible not because anyone's evil, they just want things other than "promoting competition" or "racial equity" more. Also, if you're on top, you definitely aren't taking steps to lose that position.
  • There's no substitute for effective lobbying—maybe the activists got that right. It doesn't matter whether you're the National Education Association (teacher's union), AFL/CIO, NRA, or American Medical Association. People who engage in the process get what they want—period. Maybe the federal government should have a smaller role in peoples' lives, but that's not the world we live in, today, in 2021. If you want a voice, show up.

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