Profit Is Key To Competition

"Choice, competition, reducing costs -- those are the things that I want to see accomplished in this health reform bill," President Obama told talk-show host Michael Smerconish last week.

Choice and competition would be good. They would indeed reduce costs. If only the president meant it. Or understood it.

In a free market, a business that is complacent about costs learns that its prices are too high when it sees lower-cost competitors winning over its customers. The market -- actually, the consumer -- holds businesses accountable and keeps them honest. No "public option" is needed.

So the hope for reducing medical costs indeed lies in competition and choice. Today competition is squelched by government regulation and privilege.

But Obama's so-called reforms would not create real competition and choice. They would prohibit it.

Competition is not a bunch of companies offering the same products and services in the same way. That sterile notion of competition assumes we already know all that there is to know.

But consumers often don't know what they want until it's offered, and their preferences and requirements change. Businesses don't know exactly what consumers want or the most efficient way to produce it until they are in the thick of the competitive hustle and bustle.

Nobel laureate F.A. Hayek taught that competition is a "discovery procedure." In other words, the "data" of supply and demand emerge only through the market process. We need open-ended competition not merely to see which rival is better, but to learn things we didn't know before and aren't likely to learn any other way.

"Competition is valuable only because, and so far as, its results are unpredictable and on the whole different from those which anyone has, or could have, deliberately aimed at," Hayek wrote.

Well-meaning politicians have created untold misery by assuming they and their experts know enough already.

The health care bills are perfect examples. If competition is a discovery process, the congressional bills would impose the opposite of competition. They would forbid real choice.

In place of the variety of products that competition would generate, we would be forced "choose" among virtually identical insurance plans. Government would define these plans down to the last detail. Every one would have at least the same "basic" coverage, including physical exams, maternity benefits, well-baby care, alcoholism treatment and mental-health services. Consumers could not buy a cheap, high-deductible catastrophic policy. Every insurance company would have to use an identical government-designed pricing structure. Prices would be the same for sick and healthy.

In this respect, it wouldn't matter whether or not Congress created a "public option," a government insurance plan. In either case, bureaucrats would dictate virtually every aspect of the health-insurance business.

What Obama says in favor of a public option -- as of today, at least -- tells us how little he understands competition. The public option's virtue, he told Smerconish, is that "there wouldn't be a profit motive involved." But as St. Lawrence University economist Steven Horwitz writes in The Freeman magazine, profit is not just a motive. Profit (along with loss) is what enables competition to perform its discovery role:

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