Does America Have to Overpay For Health Care to Drive Innovation?
David Eil
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Noah Smith tweeted your story. It looked interesting so I decided to click the link. Your name sounded familiar but I couldn’t quite place it. So I looked through your stories and found one that rung a bell… Economics Has No Normative Content. I read through our discussion and it felt lopsided. To see what I mean, compare it to this discussion with Koen Smets … Trading values. What’s interesting is that my first tango with Smets, a month earlier, was super short… Useful ‘Nobel’ Economics? You bet! Each tango attempt consisted of the same two people, the same general topic, but the outcomes were quite different.

Would you care to try to dance/discuss again? Obviously I’m down.

In our previous dialogue I endeavored to explain the problem with preventing people from substantially and specifically participating in the prioritization process. In other words, I tried to show why it’s a problem whenever and wherever markets are missing. I gave a few examples, including Netflix. It’s in a market but it is not a market. People who decide to give their money to Netflix aren’t given the opportunity to “earmark” their subscription dollars to the most relevant content. So Netflix knows the cost of its show Sense8 (~$9 million/episode) but it doesn’t know the actual benefit of this show. Therefore, it’s a fact that Netflix’s decision to cancel Sense8 after two seasons was not even close to being adequately informed. How can you effectively perform a cost/benefit analysis without actually knowing the benefit?

In your story you look at healthcare innovation but it’s clear that you haven’t figured out whether Netflix should be a market. Which means that you’re not quite sure what markets are good for.

According to your story, you highly regard the economist Tyler Cowen. I’ll take advantage of this! Here are some of his words…

We would then still need a standard for elevating some work as more important or higher quality than other work. Popularity of topic could play an increasingly large role over time, and that is how economics might become more trendy. — Tyler Cowen, How economics might become more trendy

I agree that we need to determine the relative importance of work… but why? It’s because resources are limited. All the attention that is allocated to one Medium story can’t be allocated to all the other stories. Resources always have to be divided among different uses. Since the uses of society’s limited resources aren’t equally valuable, optimally dividing them depends on knowing the value of the different uses. The question then is… how to determine the value of a use?

Here on Medium we click the *heart* button when we like a story. But this doesn’t at all reveal how much we like story. Therefore, we can see how popular stories are, but we can’t see how valuable they are. Here are some more of Cowen’s words…

From my admittedly atypical, hyperlexic point of view, the quality of the digital universe is deteriorating rather rapidly. I am not suggesting any of this is market failure, rather it is the “readers” getting what they want, good and hard. — Tyler Cowen, Against photos (rant)

Cowen is an intelligent guy. You’d figure that he would understand the difference between clicking the *heart* button and spending money.

Think about Netflix…

A = 100 million subscribers clicking “Like” buttons
B = 100 million subscribers earmarking their dollars

What’s the difference between A and B? Brainpower. Lots of it. B would utilize infinitely more brainpower than A.

Maybe subscribers wouldn’t want to strain their brains figuring out just how important a show is to them. But if they don’t provide this information, how can Netflix possibly have and use it? If Netflix can have and use it, without subscribers actually providing it, then what would be the point of markets?

Cowen thinks that Netflix subscribers get what they want, good and hard, despite the fact that they aren’t given the opportunity to inform Netflix what they want most.

Sure Cowen is intelligent, but how can he possibly be a good economist when he doesn’t understand the difference between liking and spending? I highly regard him as a person, but not as an economist. Then again, how many economists do argue that Netflix or Medium should be markets?

Ok, so let’s consider healthcare innovation on the public side. Scientists submit ideas to committees. The committees then rank the ideas, and distribute tax dollars accordingly. The scientists spend tax dollars on studies, and publish papers, which are ranked by “Likes” (citations). The number of votes a paper receives largely determines how much future funding the scientist will receive.

Here are two places where markets can intervene…

  1. The ranking of papers
  2. The ranking of proposals/projects

For the first intervention a Netflix for papers can be created. Subscribers would pay $10 dollars/month and be able to read all the papers. They’d also have the option to use their subscription dollars to rank the papers.

For the second intervention a market can be created in the government. Taxpayers would have the option to use their tax dollars to rank the projects. They could spend their tax dollars generally (ie healthcare) or specifically (ie proton therapy for treating prostate cancer).

Should the markets intervene?