Governments and the operation of a free market

This is a talk given in 1996 to the Economics Class of Mr. Fogel, at Miss Edgar and Miss Cramp’s School for Girls, Westmount. My daughter Lisa was in this class at the time.

Hypothesis

Many of the current ethical, social, cultural, and environmental concerns would not have arisen if it were not for the actions of government which impair the operation of a free market.

Examples

University of Waterloo administration

In the late 1960’s, when I was an engineering student at the University of Waterloo, great debates raged on university campuses all over North America and in Europe about the proper role that universities should play in society. Specifically, many students protested, among other things, the involvement of university researchers in the development of weapons for the defence establishment, the close ties to the “Military-Industrial Complex” which was seen as responsible for the Vietnam War. At the University of California at Los Angeles, students occupied administration offices. The University of Waterloo was no stranger to protest, including a sitin in the University President’s office.

The University’s response was to beef up its internal security. The “Kampus Kops” as they were called, began to patrol the campus with small station wagons with attack dogs in the back. When reporters from the student newspaper attempted to photograph these patrols, they had their cameras smashed. Of course, the administration minimized all of these incidents, and the following year, the students elected a new Student Council which promised to be a “Sandbox” student government, ie they would not get involved in politics, they would concern themselves only with arranging entertainment such as dances and pub nights.

I was active in the Engineering Society, and had run for Student Council, thus I took an interest in all these events. However, the incident where reporters’ cameras were smashed forced me to examine the role that the university administration played.

Historically, universities were collections of scholars. In fact, the University at Bologna, founded in the 11th century, initially consisted of a number of student guilds who hired their own lecturers. University administration consisted of the workers hired to sweep the floors and cook meals. Since that time, university administrations have grown to the point where, at the University of Waterloo when I was there, the number of administrative employees exceeded the number of students and faculty members put together!

Why this growth? One reason has to do with the way administrators, whether in universities, governments, or elsewhere, are remunerated.

Active Euthanasia

In 1977 I returned to school to study medicine. In our fourth year, we had an elective period in which more far-ranging topics were encouraged. I attended a course on medical ethics, in which we read a number of authors including the ex-Jesuit priest Ivan Illich, who had written “Medical Nemesis” in 1975. Among the many ideas in this seminal book, was the hypothesis that “big” government-run, technology-based medicine was actually worsening the health of individuals.
For my term paper, I wrote on an extension to this idea: how ethical issues in modern medicine result from economic decisions made for reasons entirely separate from the subsequent ethical concerns. As an example, I used active euthanasia, which then as now is a hotly debated topic in society.

In medieval times, if one was suffering terribly from a terminal illness, it was a simple matter to contact the village “wise woman” who could provide a poisonous extract of plants, perhaps the purple foxglove which is the source of digitalis. The “wise woman” unfortunately was denounced as a witch and executed by the Church. The physicians and pharmacists of the time took a different approach to the competition represented by wise women: they organized themselves into guilds, and applied to the city-state governments of the day for charters which gave them the exclusive right to practise their professions. Their argument was that this would protect the public from incompetents or “quacks” but in essence their interest was purely economic – they wished to have the market for their services entirely to themselves, without the competition that the wise women represented. This may also have been a gender issue, but that’s another topic.

Today, if one wishes to end one’s terminal suffering, it is no longer possible to obtain the means to do so easily. Because the prescription and dispensing of drugs is entirely controlled by the medical and pharmaceutical professions, the suffering patient and his or her family have no options but to find a sympathetic doctor who is willing to act outside of the law, or go to the black market. Meanwhile, ethics committees in the hospitals endlessly debate whether brain-dead patients should be “unplugged” or not, and hospitals go to court to force families to keep paying for the care of patients in permanent vegetative states.

Welfare

As a psychiatric resident training at Douglas Hospital in 1983, I undertook a project to help some of the more chronic mentally ill patients of the hospital. As you probably know, many people with chronic mental illness are on welfare; their illness often prevents them from working at anything but entry-level part-time jobs which do not involve interacting with the public. If you think about it, there are very few jobs like that.

I was motivated by my observation that people on welfare, not only mental patients but healthy individuals as well, faced significant obstacles in attempting to return to the work force. Firstly, the amount of money an individual can earn working full-time at minimum wage is basically the same as what he or she would receive on welfare; in fact, welfare will be more if you have dependents. Secondly, the expenses of the working individual are higher than those of the person who remains on welfare: when working, you need an alarm clock to get you up on time; proper clothes and shoes (and possibly makeup) appropriate to your job; money for a bus pass to get you to work; foods which you can take to work for your lunch. For many on welfare, because of inability to organize themselves, actual costs are higher: taxis for when they fail to get up on time; money for lunch when they haven’t done their shopping.

Then there are the items which you receive for free if you’re on welfare: medications, eyeglasses, hearing aids. If you somehow manage to find and hold a job, you now have to start paying for these items out of your own pocket.

What I hoped to do at Douglas Hospital, was to start a horticultural cooperative. With the hospital administration’s backing, we obtained permission to use the greenhouses on the hospital grounds, had maintenance build a set of “cold frames” nearby, found a volunteer with extensive knowledge of horticulture, patients who were interested, and a plan of action. What we planned to do, was to borrow several hundred dollars from the hospital, buy soil, seeds, polystyrene containers, etc. and grow annual flowers from seed in the early spring, initially in the greenhouses and later in the cold frames, and then sell the bedding plants around Victoria Day in late May. The proceeds from selling the plants would first of all go to pay off the loan, buy more supplies for the next year, and the leftover profits would be distributed to the members of the cooperative, the patients themselves, who were doing to work. This would boost their self-esteem by permitting them to benefit from work, something important to all of us.

Only one snag: the welfare rules are that if a person earns income, his or her welfare cheque will be “docked” by an amount equal to the earned income. Basically, you’d be working for nothing. How could we get around this? What if the members didn’t actually get money from the co-op, but instead their share value increased in proportion to the amount of work they did? The hospital agreed that the hospital’s lawyer look into this possibility: no go. Any income, in cash, benefits, or whatever, meant your welfare cheque would be reduced. No way to get around it. We even considered ideas like having the co-op buy or rent a house in which the co-op members could live at reduced rents. Again, our lawyer, $1500 dollars in legal fees later, told us it couldn’t be done. Not only was the patients’ motivation seriously hindered by this turn of events, so was my own!
We did eventually start the co-op anyway, although we never figured out a way to remunerate the patients. The hospital administration “co-opted” the co-op after I left to continue my residency training at another hospital, and turned it into a horticultural therapy project.

But I was left puzzled: why was the government so rigid about welfare? Why did it seem to be set up in such a way to impede welfare recipients from ever getting off the welfare rolls and back to gainful employment? Who was benefiting from keeping people on welfare?

This last question is important: who indeed benefits from welfare? I imagine you’ve already studied how money can be put to work to generate more money, this is money as capital. Do welfare recipients have the opportunity to put the welfare money (or their own savings) to use to generate wealth? They can’t: if they do have any savings, they can’t receive welfare. The welfare stipend is set at a level that the entire cheque is used every month for food, shelter, clothing, etc. So the welfare recipient is not able to generate wealth with the welfare money.

But who gets the welfare money eventually? Why, landlords and merchants, of course, who provide the welfare recipients with necessities of life. These people benefit directly from welfare, because welfare recipients are able to pay higher rents and pay higher prices for other goods and services than poor people could in the days before welfare. Landlords and merchants have thus been able to charge higher rents, and post higher prices, for the same product. Check this out for yourself: compare prices in the supermarkets in Point-St-Charles to those in Westmount.

The landlords and merchants are thus the main beneficiaries of welfare: their profits go up without any more work on their part. Do they have a vested interest in keeping the welfare system as it is? You bet they do! Do they have the power, the political clout, to influence government to keep it that way?

Again, this requires the active collaboration of government in limiting the operation of the free market.

Cutting Health Care Costs

You are all aware of the recent closures of several hospitals in the Montreal area. The professed purpose is to save money, to reduce the government deficit. But how will this work? It seems simple in principle: each hospital has a global budget, with funding provided almost entirely by the provincial government. Close a hospital, and all the global budget, say $100 million annually for one midsized hospital, will be saved. But is it so simple?

Let’s look at how the costs break down: about 85% of a hospital’s budget goes towards labour costs: salaries and fringe benefits. Most of the hospital’s employees are unionized, and the labour contract states what happens when a hospital ward, or the entire hospital, is closed. If a fulltime employee has 2 years of seniority (ie has worked 2 full years) then he or she has a guaranteed job until age 65. If there are no jobs available, then that person will receive a full salary to stay at home. What about non-union employees? Well, middle management people, such as head nurses, may certainly lose their jobs and have to collect unemployment insurance. Secretaries and others in jobs which are non-union, but could be unionized, receive the same benefits as unionized employees. Not only are there no cost savings for this large number of people who are guaranteed jobs, but the process of “bumping” whereby somebody with more years of employment gets to “bump” another employee out of their job, so that the bumped person then has to go and bump somebody else, leads to a whole chain reaction of people being forced out of jobs they like. This process lasts for years; the ill feelings and drop in morale and productivity may last even longer.
What about the patients? Do they stop getting ill just because the hospital is no longer open? If they continue to get ill at the same rate, do they get better faster, so that a smaller number of hospital beds in a given area can look after the same number of ill people by sending them home earlier? Well, people do get sent home earlier; this is part of the “virage ambulatoire”. In addition, serious attempts are being made to provide services to people at home, for example the frail elderly, so that hospitalization becomes unnecessary except for severe cases.

If a person can be looked after at home, that would be cheaper, wouldn’t it? After all, now the family, and not the hospital, provides meals, cleaning, laundry services, and so on. Unfortunately, costs of home care may be higher than for hospital care in some cases. Consider that hospitals are a perfect example of economies of scale: on a given nursing unit, a small group of nursing personnel provide care to a larger group of patients, because most patients don’t require constant care. A nurse doing home visits can look after fewer patients, because the travel time between patients must be taken into account.

So if closing hospitals will not save very much money, why is our government so keen on doing it? Besides the political angle, it may be instructive to examine what motivates decision-makers in government.

Remuneration for Government Bureaucrats

As you know, government functionaries are paid salaries. What determines the size of someone’s salary? Obviously, level of education, years of experience, performance reviews play a role. But the influence of these factors is small in comparison to the classification level for the employee. What determines the classification level? Within a given job category, say management, the most important factor is the size of the department being managed, ie the number of people in that department.

It isn’t only the manager’s salary which is tied to the size of the department. There are government norms for the size of the office, whether it’s a corner office, how many windows, the quality of the office furniture, even the thickness of the carpet pile! Other perks include the size of the expense account, whether an automobile is provided, membership in a country club, even how pretty the secretary is!

All of these factors influence the manager to make decisions which do what? Decrease the size of his department to save the taxpayers money? Or increase the size to have more salary and perks?
For many people, it isn’t even a question of a choice. Because along with the larger department comes more power and influence, and these are truly irresistible for many people.
What’s the best way, class, to increase the size of your department? Increase the size of your department’s budget. In other words, grow. Well, this is the same philosophy as that of a cancer: growth for the sake of growth.

The result of this philosophy of growth, which applies not only to governments but also to government-funded organizations, including hospitals and other health care institutions, public schools and school boards, universities and research organizations, the armed forces, and so on, are decisions which increase costs and lower efficiency. This helps to explain why the administration at my university had grown to the point where students and teachers were outnumbered, and decisions were being made which were no longer in the interests of the students and teachers, but for the welfare of the administration itself. Remember the philosophy of the cancer cell.

Does this happen only in governments? I think it can happen whenever an organization gets too large. How can an organization get too large?

Consider a small business. If the product is right, there is demand for it, and there’s a good profit margin, the businessman will have no difficulty in expanding, either by reinvesting profits or by finding additional investment capital.

But in a free market, sizable profits will quickly attract competition. Unless the first business adapts to maintain profitability, it will sooner or later go out of business. This is as it should be. But no one wants to die. What to do if you are unable to adapt enough? An effective approach is to insulate yourself from competition. And the mechanism is through government. Governments can grant certain organizations exclusive rights, for example, through licensing mechanisms. This applies to doctors and pharmacists, as I’ve described above. But it also applies to taxicabs, forestry companies, street vendors. Other mechanisms include import duties, quotas, and tariffs; subsidies; marketing boards for products such as wheat; fee schedules (for example, the Crow’s Nest Pass rates); preferential tax treatment (for example, for mining exploration, films). I’m sure you can think of many more ways in which governments act to prevent the operation of the free market, in order to benefit certain groups and individuals.

What’s in it for government? In many countries, graft and corruption are a way of life, and represent the way in which companies and other large organizations (for example, the Mafia) reward government people for making it possible for them to operate. In countries like Canada, the influences are frequently more subtle: contributions to the war chests of political parties; the opportunity for government functionaries to hobnob with the rich and powerful. And there are frequent crossovers between big business and big government: Brian Mulroney stepped out of a job as chairman of the Iron Ore Company of Canada and into the prime minister’s job. In the 1960’s, the founder of a company which was one of the biggest polluters in Atlantic Canada was appointed to head up the National Research Council.

Conclusions

Big government acts to stifle competition; this prevents the free market from operating, and has all sorts of fallout: inefficiency, trampling on the rights of individuals, systems like welfare which reward certain people (landlords and merchants) at the expense of taxpayers who work for their money; and the evolution of institutions like organized medicine in which questions about active or passive euthanasia, abortion, who gets access to organ transplantation or kidney dialysis, and so on, have become so-called ethical questions. It’s spawned a new breed, the medical ethicist (who are also on the government payroll).

What do I advocate? Tiny governments, fulfilling only those roles that cannot be performed by the private sector. Possibly only the judiciary and a small legislative arm to create a criminal code. What do you think?

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