Economic Theory

How NHS worshippers copy the worst habits of economists

The economist Ely Devons once said that “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’”

It was a perceptive critique of blackboard economics. Two examples of that tendency come to mind. On one of the first pages of most Econ 101 textbooks, you will find an explanation of why lighthouses could not possibly be provided privately. Lighthouses are a clear example of a public good. They cannot selectively shine their light only for those boatmen who have paid towards their upkeep. Thus, the boatmen will try to freeride, making use of the lighthouse, but preferring somebody else to pay for it. But if everybody tries to do that, the lighthouse will not be provided in the first place.

It sounds perfectly plausible. It is also wrong. There are plenty of historical examples of privately financed lighthouses. True: the light was free at the point of use. But there was a way around this problem, which seems obvious once somebody spells it out: Lighthouses were often provided by port operators, and financed through landing charges.

In one of the later chapters, you will find a reference to the ‘market for lemons’ model, which shows how information asymmetry leads to a breakdown of the market. When we cannot assess the quality of a product, our willingness to pay decreases, because we are pricing in the possibility of being sold a ‘lemon’ (=a shoddy product). Sellers will respond to our reduced willingness to pay by taking high-quality products off the market. We will respond by adjusting our willingness to pay further downwards. This leads to a downward spiral, which will eventually lead to a collapse of the market.

Again, it sounds perfectly plausible. And again, there are plenty of thriving markets that should not exist according to that theory. Markets have developed mechanisms to deal with information asymmetry, such as money-back guarantees, periods of free insurance, independent certification, online reviews etc.[1]

The problem with economics is not abstract theorising as such, it is not that it is ‘divorced from the real world’. Solutions like the above are not the result of ‘thinking outside the box’; they are entirely compatible with textbook economics. But they would not have occurred to you. They are like a ‘What’s wrong with this picture?’ riddle, where the solution is also obvious in hindsight, as soon as somebody spells it out. Economists assume that just because they don’t spot the mistake in the picture, there could not possibly be any.

But it is not just economists. In my experience, NHS worshippers make a similar mistake. They come up with elaborate explanations of why market mechanisms in healthcare could not possibly work, and then close the case. They never look at actual market-based healthcare systems, of which there are plenty; they do not inform themselves about how such systems actually work. They do not go and look at horses; they sit in their studies and say to themselves, ‘What would I do if I were a horse?’. And they conclude, or rather, know a priori, that being a horse would be horrible.

Mixed provision, some public, some private? Impossible. The private sector would snatch the easy, profitable bits, leaving the public system to deal with the complex stuff. Private providers would cut corners, putting profits over people’s health. Profits would leak out of the system, lining the pockets of fat cats and tax dodgers while patients suffer. The inclusion of private providers would artificially fragment the system, undermining cooperation between different medical specialties, and the system’s ability to deliver integrated care. It would also undermine the system’s ethos, replacing community spirit with the cold, hard, calculating logic of the market. And then, there’s the slippery slope argument. Give the market an inch, and it will take a yard, and then a mile, and then a few more miles. Eventually, it will take over the whole system.

Such arguments will guarantee you the approval of Britain’s groupthink-prone, market-averse medical community. They all sound plausible, at least if you start from the worst possible assumptions about how markets work. But they are also nonsense. There are plenty of market-based and mixed systems that work just fine, including in France, a country not generally known for its exaggerated faith in free markets and private entrepreneurship. Nor is there a continuous drift towards greater marketisation (or, for that matter, in the opposite direction) over time. All kinds of mixtures can be stable in the long term.

If you want to get an idea about how market-based systems work, you need to look at actual examples of such systems in action, not just project your own worst fears. ‘Cherry-picking’, for example, is almost always the result of a reimbursement formula that does not reflect actual costs. It can be prevented in a market system, and it can be a problem in a public system. ‘Corner-cutting’ is held in check when companies depend on the trust of patients for their economic survival, and when companies which lose that trust can go out of business. Profits are generally held low by competition; in fact, the general trend in European healthcare industries has been one of consolidation, because there used to be too many unprofitable players in the market. Healthcare providers can, and do, cooperate in some respects, whilst still remaining competitors. Some systems achieve higher levels of integration than the NHS does. Of course, such systems have their problems. But they are normally of a completely different variety – they are not the kind of problems we are told to expect.

In my experience, NHS worshippers are not particularly fond of the economic profession, which they see as a neoliberal conspiracy. And yet, in an important respect, they are more similar to their opponents than they realise. Economists need to look at actual horses more often. And NHS worshippers need to look at healthcare systems other than the NHS more often.


[1] Interestingly, George Akerlof, who wrote the original ‘lemons’ paper, knew this, and discussed such possibilities. Too many of those who later referred to him did not.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

Leave a Reply

Your email address will not be published. Required fields are marked *