CT Progressive

From a Newsweek profile, Joe Stiglitz reminds us of one of the most important critiques of the free market: that it is amoral. In his formulation, if there’s money to be made by one party in a transaction having better or more accurate information than the other, then it will happen.

Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how “imperfect” information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: “Globalization opened up opportunities to find new people to exploit their ignorance. And we found them.”

The problem of unequal information between businesses and consumers is even more pronounced in the health insurance market, not just when it comes to the definition of necessary versus experimental treatments and the costs that trigger recision investigations, but also with reimbursement rates, where the government is generally denied basic information about what exactly a Medicaid dollar is purchasing. Which leads to craziness like this:

We don’t have a rational market where both purchaser and seller have good information to make decisions. We have an irrational market where key information is concealed to protect unreasonable profits and unsustainable business models. Which is a big part of the benefit of a public option. Even if it doesn’t change the kind of healthcare that most people are getting, it will put the market on a sustainable path where cost bears some relationship to services delivered.

This entry was posted on Sunday, July 19th, 2009 at 2:00 pm and is filed under National Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.