Robert Goldberg, in a recent National Review Online piece, "Continue the W. Revolution," says "Republicans should honor and build upon the political courage and intellectual honesty of George W. Bush by pushing his program of Medicare and prescription-drug reform..."

However, Bush's proposal represents no "revolution," but simply an extension of the welfare state that incorporates more market-like mechanisms than does Gore's proposal. Those who feel that there is little possibility, at present, of repealing the welfare state, and that the best near-term political result that can be hoped for is to hold it in check, are probably correct. In terms of political reality, the demand for some sort of prescription drug coverage under Medicare may be overwhelming, and any politician who hopes to get elected may have to acquiesce to this demand. No government can survive for very long if it does not reflect the ideological disposition of the majority of the people it governs.

Nevertheless, there is a very good reason to continue to promote the ideal of a laissez-faire economy, even after acknowledging that it is not going to come about any time soon. SUNY Purchase economics professor Sanford Ikeda has written an excellent book, Dynamics of the Mixed Economy, in which he extends the analysis of interventionism of Ludwig von Mises. Ikeda demonstrates the patterns that the interventionist process is likely to follow. His analysis begins with the Misesian insight that each government intervention in the market will produce a result that, even from the point of view of those promoting the intervention, is less desirable than the state of affairs that existed before the intervention. This is because the market participants are not supine in the face of interference with their wishes.

An unhampered market brings about an outcome that conforms to the voluntary preferences of market participants. Any interference with the market process will, to some extent, thwart the realization of those preferences. Market participants, in the face of this interference, will act to reassert their desires. However, this process is now made less efficient, due both to the overhead of the government program itself and to its effect of distorting the market signals of prices, interest rates, profits and losses. Entrepreneurs are discouraged from pursuing opportunities in regulated areas. For example, farm subsidies will make the search for more efficient methods of farming less urgent. Meanwhile entrepreneurs pursue other opportunities that, in the unhampered market, would have been considered superfluous -- consider the proliferation of lobbyists and tax accountants.

Several examples of the perverse effects of intervention are well known. The negative impact of rent control, which creates the very housing shortage and high rental costs it was designed to alleviate, is extensively documented. Similarly, minimum wage laws worsen the economic condition of those they were meant to help, through increasing unemployment among the most impoverished.

Ikeda shows that, unless the prevailing ideology is strongly laissez-faire, the problems resulting from one intervention lead to calls for other interventions to fix them. People sense that "something is wrong," but unless they have a firm grounding in economics, it is difficult to trace the problem to the intervention. As each succeeding intervention moves the market further from its unhampered state, the process of tracing the problem back through these myriad distortions becomes torturous.

Nothing could illustrate this situation better than the "health-care crisis." Initial government interference, in the form of licensing requirements, restricted supply and drove costs up. A further government intervention, the wage controls imposed during World War II, led employers to offer "free" health insurance in order to attract employees. This third party provisioning of health insurance made health-care consumers less price conscious, driving up costs still further. The subsidy of demand through Medicare and Medicaid added yet another factor increasing costs. The market responded with strange entities such as HMOs. (Notice that we do not see AMOs in the automobile industry, or CMOs in the computer business.)

In answer to the problems that have developed, the major policy proposals involve, just as Ikeda predicts, further interventions to correct the unfortunate consequences of past interventions. Goldberg, as if to illustrate this point, says: "As most know by now, Medicare currently provides coverage for hospital therapy and doctor therapy, but not drug therapy. Failure to cover drugs in the current system creates perverse incentives that waste resources and endanger patient health... Both the Gore and Bush plans would improve on the current situation..."

However, new interventions will simply add new distortions to those added by previous interventions. It is impossible to "intervene" the economy back to the state that the unhampered market would have achieved, as there is no way, in the absence of the market process, to discover what this state might have been.

Goldberg acknowledges that under either plan, there will be certain drugs that are covered, and others that are not. He asks, "Under which plan will these lists of drugs be more likely to be used to limit access to new and better drugs at the price of increased risk to patients?" But he fails to note that either plan will certainly have the unwanted effect of focusing prescription and research on listed drugs, to the detriment of patients who might have benefited more from other drugs. When this problem is noticed, there will surely be some politician recommending another intervention to correct it, perhaps by asserting a patient's "right" to a greater variety of subsidized drugs.

Goldberg worries about increasing drug costs under Gore's plan. However, subsidizing drug purchases in any fashion can only lead to increased costs. While it is true that some of this new spending on drugs will be shifted from spending on hospitals and doctors, other shifts will occur from other goods into medical spending, where the marginal utility of an additional dollar spent has been raised by the new subsidy.

This analysis of the intervention process might seem to counsel despair to those who favor a free economy. But Ikeda contends that the intervention process inevitably leads to a crisis, where the effects of multiple interventions have become so pernicious that the possibility of a dramatic turn toward free markets becomes possible. The oil crisis of the late 1970s offers an example of such a crisis point, when a deregulation of the oil industry that would have been unthinkable a decade before took place fairly rapidly.

It is because of the existence of these crisis points that it is important to continue to put forward the case for pure laissez-faire. When the crisis hits, a turn toward the free market is not inevitable. The other possibility is to turn toward socialism or fascism, in order to eliminate the remaining "market failures," and allow state regulation full sway. Which direction the system takes in a crisis will depend, to a great extent, on the ideological leanings of the public. An important aspect of people's decision is that they realize that there is a choice. If the supposed defenders of the market order have been pushing a series of interventions as "free market solutions," the public is likely to decide that laissez-faire has been tried, and has failed. This is exactly what occurred in the 1920s and early 30s, as thoroughly documented by Murray Rothbard in America's Great Depression. Several Republican administrations, from the purportedly free market party, engaged in an unprecedented amount of economic meddling. When the crisis hit, it was widely seen as a failure of laissez-faire, resulting in the New Deal. Now, we don't want that again, do we?

November 7, 2000