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Ep. 82 The Economics of Healthcare: Market Failure or Faulty Models? (Part 1)

Robert P. Murphy, PhD

It is commonly believed that healthcare is a sector plagued by “market failure.” A heavy dose of government intervention is therefore necessary to optimize the needs of society. A paper most commonly cited in support of that view is one published in 1963 by Nobel Prize winner Kenneth Arrow, one of the giants of economic theory in the 20th century, and titled “Uncertainty and the Welfare Economics of Medical Care.”

But how does economic theory arrive at the concept of market failure and how do economists conceive of health care when they apply their theoretical models to medical practice?

To help sort this out, we have as our guest Robert P. Murphy, economist, teacher, and author of many books.  Dr. Murphy obtained his PhD from NYU and is Senior Fellow at the Mises Institute.  He is co-host, with Tom Woods, of the popular podcast Contra Krugman and he is also host of The Bob Murphy Show, “a podcast promoting free markets, free minds, and grateful souls.”

The episode in in 2 parts.  In this first part, we review the theoretical framework that forms the background to Arrow’s paper.  In the upcoming second part, we will delve into the paper itself, discuss how economists conceive (or misconceive) of medical care and what the implications have been for the US healthcare system as a whole.

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2 Comments

  1. Marc Fouradoulas on 06/23/2019 at 4:08 PM

    Thanks for your effort to clarify this (nonsense) theory! Arrows article is really old and a hard read. Is it still relevant among current mainstream economics or is it outdated? What happened to welfare economics in the past 60 years?

    • Michel Accad on 06/23/2019 at 4:35 PM

      Thanks, Marc. Yes, that’s a question (or objection) many will raise, but I think the “spirit” of the paper is alive and well, even if people and economists may have moved on. But they have not really moved on. See a book called “Moral Hazard in Health Insurance” published in 2012 by Amy Finklestein. It claims to finally provide answers to relevant questions raised by Arrow in his paper. Also, welfare economics is still around by crazier than ever, and not just in healthcare, of course.

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