Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture capital behind him. Capital can refer to either the tools of production or the funds that finance them. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Labor Day and Capital Day—I don’t know why we should have just one and not the other.

Happy Capital Day, America!

Lawrence W. Reed

The book, edited by Greg Forster and C. Bradley Thompson, is a compilation of papers presented at a 2008 conference sponsored by the Foundation for Educational Choice (formerly the Milton and Rose Friedman Foundation for Educational Choice) and the Clemson Center for the Study of Capitalism. (Additional chapters have been added.)

Drawing on Austrian and Public Choice theory, Richman’s chapter argues that as long as government is involved in the finance of education in any manner — even through vouchers or tax credits — the market’s entrepreneurial process will be stifled and education will fall short of what could be achieved in a truly free environment. The quotation in the title is from Joseph Priestley, whose views on education Richman discussed in a TGIF column last year.

In the book’s foreword Harvard University professor Paul E. Peterson writes:

In the strongest statement of all, Sheldon Richman draws upon classic economic theory to make the case that any government involvement–even school vouchers and tax credit subsidies–will ‘forbid the full blossoming of the entrepreneurial environment that is indispensable for optimal education.’ Better than any partial solutions is a commitment to letting the current system implode so that the country, in final desperation, will finally return to free market principles. One wonders whether the charitable tax deduction, an important prop for education’s private sector, survives Richman’s strict prohibition on any government involvement at all….

…We all benefit from Richman’s clear iteration of market theory, as he makes so utterly clear the distance school choice has yet to travel before it even begins to approximate that ideal.

The book, to be released on June 7, is available on Amazon for pre-order here.

Lawrence Reed, of the Foundation for Economic Education, explains [spontaneous order] this way:

“Spontaneous order is what happens when you leave people alone — when entrepreneurs … see the desires of people … and then provide for them.

“They respond to market signals, to prices. Prices tell them what’s needed and how urgently and where. And it’s infinitely better and more productive than relying on a handful of elites in some distant bureaucracy.”

The column continues with a discussion of FEE founder Leonard E. Read’s “I, Pencil.”

Another way to understand spontaneous order is to think about the simple pencil. Leonard Read, who established the Foundation for Economic Education, wrote an essay titled, “I, Pencil,” which began, “[N]o single person on the face of this earth knows how to make [a pencil].

Read the column here.

To watch the video segment with Mr. Reed on Stossel’s Show click here.

Note: The first two and a half minutes are quiet due to an issue we had with the mic while recording. After the 2:30 mark, the recording becomes much more audible. We apologize for the inconvenience.

Download Powerpoint

Who could be against those things?

Well, Obama for one, followed by House Speaker Nancy Pelosi, House member Barney Frank, and everyone else who favors what is question-beggingly called reform. The word reform suggests not just change but improvement. Therefore, to call the proposals to nationalize the medical-insurance industry reform is to assume precisely what is in dispute and must be proved. The argument is — or should be — over whether the proposed changes indeed are reform. To call them reform before the debate has even begun is to rig the discussion. It’s an old — and sadly effective — bit of sophistry.

But let’s get back to competition and choice. I contend that what Obama favors would produce the opposite of competition and choice: cartel and restriction. This is so clear that it’s hard to believe an intelligent person surrounded by economic advisers wouldn’t know this.

We’ll use HR 3200 as our guide. Most of the provisions of this bill are likely to be in any final legislation, with the possible exception of the government-operated insurance program, or “public option.”

The bill begins with a provision “to establish standards to ensure that new health insurance coverage and employment-based health plans that are offered meet standards guaranteeing access to affordable coverage, essential benefits, and other consumer protections.” No insurance policy would be deemed qualified unless it satisfied the conditions imposed by the government. This is important because under the bill, every individual would be mandated to have a “qualified” health plan. A sub-standard plan that nevertheless satisfied a particular consumer — such as low-cost high-deductible catastrophic coverage — would be forbidden.

According to the bill, a plan would be accepted as qualified only if, among other things, it:

• covered preexisting conditions without limit;
• accepted all applicants;
• guaranteed renewal;
• charged everyone, regardless of health status, the same premium within an area, with the exception of age and family variations defined either by the legislation or by state law;
• had achieved the medical loss ratio defined by the Health Choices Commissioner (the ratio refers to the percentage of revenues paid in benefits; companies that fell short would have to give policyholders rebates);
• imposed no annual or lifetime limit on coverage; and
• was “equivalent … to the average prevailing employer-sponsored coverage.”

The “essential benefits package” would have to cover:

• hospitalization;
• outpatient and emergency services;
• professional services;
• incidental services, supplies, and equipment;
• prescription drugs;
• rehabilitative and habilitative [?] services
• mental-health and substance-use disorder services
• preventive services (Obama has specified physical exams, mammography, and colonoscopy);
• maternity care; and
• well-baby and well-child care

The bill would also set up a Health Benefits Advisory Committee, a public-private panel of “experts,” “to recommend covered benefits and essential, enhanced plans.”

Government Definition

There are other requirements but we need not go into them. The point of this tedious recitation is to convey to the reader how precisely the government would define private insurers’ business practices and products. To varying degrees state governments already define these things; this is part of the corporate-state bargain in which companies get cartel rents through protection against new competition in return for complying with various regulations that they take a hand in writing. But this would be the first time that the national government would dictate what minimum health coverage would include and other company practices. For that reason, such a law would effectively create a national health-insurance cartel. Big Insurance, which has been working with the Obama administration behind the scenes, has no problem with any of this.

Now let’s look at the “public option.” This would be a government-operated insurance plan that would be offered in a “Health Insurance Exchange,” which the government would establish “to facilitate access of individuals and employers, through a transparent process, to a variety of choices of affordable, quality health insurance coverage.”

Apparently members of Congress and the administration don’t know about the Internet, which performs the same function for every other good and service. If there’s no health-insurance market on the Internet, it may be because government forbids interstate competition, in order to protect the states’ ability to burden their residents with coverage mandates for hair transplants, in vitro fertilization, and other things offered by privileged businesses.

In case there is any doubt about the nature of the “competition” that is to take place in the exchange, the bill states, “The Commissioner shall specify the benefits to be made available under Exchange-participating health benefits plans during each plan year.” No company may offer so-called enhanced, premium, and premium-plus plans unless it also offers a basic plan. (These are defined in the bill.) State mandates would continue to apply if a state and the commissioner work up a suitable agreement.

According to the bill, the public option would be a “low-cost” high-quality plan that would have to follow the same rules as private exchange-participating plans. The secretary of Health and Human Services would set premiums adequate to cover benefits and administrative costs. However, the government plan would get a $2 billion starter loan from the Treasury (no interest rate mentioned), along with enough money to cover claims for the first 90 days.

To avoid the charge that the public option would have continuing access to the Treasury, the bill states, “Nothing in this section shall be construed as authorizing any additional appropriations to the Account, other than such amounts as are otherwise provided with respect to other Exchange-participating health benefits plans.” (That’s right — private companies will get subsidies.)

The secretary would be authorized to set reimbursement rates for providers, generally using Medicare rates, except for a three-year “initial incentive period,” in which more would be paid. What happens if a doctor thinks the bureaucratically set rates are too low and refuses public-option patients? I couldn’t find an answer in the 1,000-plus bill, but I don’t think I’d want to be in his white coat. The licensing power is awesome.

The immediate question that should arise about the public option is why — if it must support itself through premiums  — the government needs to set it up in the first place. What’s the point of having one more entity selling the same thing private insurers must sell under the same pricing constraints?

Advocates of the public option would say that since it would be a nonprofit enterprise run by public-spirited personnel, it would keep the private firms honest. We’ll get to this in a minute. I’ll just point out here that “The Secretary may enter into contracts for the purpose of performing administrative functions.” That should allow for plenty of favoritism and rent-seeking.

We are entitled to some skepticism toward the bill’s limitation on subsidies to the public option. Based on experience — the Postal Service, Fannie Mae, Freddie Mac, and the federal flood-insurance program, among others — we can expect that the public option will be bailed out by Congress when it runs into trouble. The language of the current bill can always be amended later. The starter loan could be forgiven (see the flood program). Only naïveté or disingenuousness could prompt one to insist otherwise.

That’s a small part of what the bill would do. But remember, the stated objective is competition and choice. So we must ask: What relation does the bill have to those objectives? If we understand the nature of competition, the answer must be: no relation at all.

Instead of competition the bill would create a newer, bigger insurance cartel, directed from Washington. Calling Obama’s exchange a “competitive market” is like calling a graveyard a “bazaar.”

Discovery through Competition

As Ludwig von Mises and F. A. Hayek elaborated, competition is valuable not primarily as a contest among producers of known goods and services using known methods of production and business practices. Rather, to use Hayek’s phrase, competition is a discovery procedure. (I believe “process” would have been the better word.) What it does is teach us things we didn’t know before the competition took place and might not learn otherwise. What kind of things? Things such as: which hitherto-unknown products best serve consumers’ interests as they see them, at what price, and through which low-cost methods. Such things can’t be known in advance; computers can’t give us the answers after data entry. The most relevant “data” do not exist as such! The information is decentralized and much of it, such as nuanced consumer preferences, is rarely articulated. Rather, it is revealed as would-be producers and consumers go about their business, improvising on the spot in their efforts to improve their conditions. It certainly is not available to a bureaucracy or panel of experts.

The importance of this discovery process should be clear for any good or service, but how much more so for medical services, where the potential for variation in individual needs and preferences is virtually infinite!

Obama’s plan shows no appreciation for competition’s discovery role. He and his experts claim already to know — or will later decide — what insurance products should be offered and what business practices should be used. The bill would permit no variation — that is, no competition. There would be none of the free market’s entrepreneurial trial and error, in which firms offer competitive products, and consumers render verdicts on them.

The public option would not increase competitiveness. On the contrary, because of its implicitly privileged position it could engage in predatory pricing and force private firms out of the market or prevent new ones from entering. The record of the federal flood-insurance program is instructive.

The tipoff that Obama can’t really be interested in competition is his disparagement of profit. Yesterday he said that a good thing about the public option is that “there wouldn’t be a profit-motive involved.” Apart from this revealed bias against self-interest and his failure to understand that mutual benefit can be achieved through its pursuit, Obama shows no sign of grasping the communications role performed by profit and loss in a market. (See Steven Horwitz’s “Profit: Not Just a Motive.”) At any time scarce resources and labor could be used in a large variety of ways to produce a large variety of things. Some of those uses and methods would serve consumers better than others. Tradeoffs are unavoidable. How are consumers to make their subjective preferences known? In the market they do so by, in effect, rewarding profits and imposing losses through their decisions about what to buy and what not to buy. Profit indicates that producers are doing what consumers want: turning lower-valued inputs into higher-valued outputs. The profit-loss system, to the extent it has been allowed to work, has consistently produced more for less. As Mises and Hayek showed, there is no alternative to market prices and profit-loss for directing productive efforts and resources to where we most want them. No bureaucratic approach can solve this “knowledge problem.”

For all his talk about choice and competition, what Obama proposes is more of what we already labor under: corporate-state bureaucratic decision-making. The status quo is not the free market. It is a system of government-business collusion that, among other things, welds workers to their employers. Obama’s scheme would simply be more of the same. The reason Big Pharma and Big Insurance favor the scheme is that everyone would be forced to buy their products or coverage for their products, with the taxpayers picking up most of the tab.

Obama offers no radical break with the present but only a further application of the statism that brought us the current morass.