How Much Would You Pay For Your Next Breath Of Oxygen? When Capitalism Fails

06/03/2010 06:45 pm ET | Updated May 25, 2011
  • Howard Steven Friedman Statistician and health economist for the United Nations; Teacher, Columbia University

Phil began grilling me, "the US economy should rely on pure free market capitalism for everything. Anything involving the government is wasteful and incompetent. Right?"

"So the government should have skipped TARP and let the banks fail? Pure free market capitalism would have said let the chips fall and the strongest companies will survive to swallow the failures."

Phil, who recently had received a 7 figure bonus as part of his investment bank compensation, cleared his throat, whispered, "that was a once in a lifetime event, I promise" then winked.

"Maybe you mean capitalism, when appropriately regulated can be a great engine for economic growth but unfettered capitalism can bring the nightmare scenarios of Karl Marx or repeated bubble economies (that crash with the middle class holding the bill) to life."

Phil pointed to my Red Bull, "After Americans began chugging Red Bulls by the caseload, other companies leaped to create new energy drinks. After Vitamin Water built a large consumer base, countless competitors added vitamins to colored sugar water to lure consumers. Free market capitalism breeds competition and innovation. Free market capitalism works."

"It often works well. But it can also fail. If fails when consumers don't have the chance to make informed choices between desirable options. Capitalism fails when a monopoly eliminates all possibility of competition. It fails when marketplace collusion allows price fixing. It fails when fraud occurs. It often fails when the demand is relatively insensitive to price - textbooks call this relatively inelastic demand."

"What are you talking about? When prices go down, demand goes up. When prices go up, demand goes down. That's basic economics."

"Only when demand is elastic. Let me give you a crazy example. Imagine oxygen wasn't available for free in the air, but that you had to pay. If I charged $1 for each tank of oxygen, would you pay?"

"Of course, it's either pay or die."

"How about if I charged you $10,000 for each tank of oxygen?"

"It's still either pay or die. I need the oxygen no matter what. But, at those prices, I'd try to figure out how to live with less oxygen."

"You'd start rationing how much oxygen you use, though the result will likely be you dying an early death from side effects of chronic hypoxia. If you don't get another big bonus you'll eventually run out of money and die a very quick death. Paying for oxygen sounds strange but how about water? Remember that incident with the Bolivian water supplier?"

"When the World Bank forced Bolivia to privatize their water system as a condition for renewing loans? The Bolivian government agreed to the terms of the sole bidder, who turned around and increased the price of water about 35% almost immediately."

"Bolivians still needed water even though the new price meant water was now going to cost a huge percent of the Bolivian minimum wage salary. Bolivians angrily took to the streets in protest."

Phil was starting to see my point. "So with relatively inelastic demand, no matter what the price is, I still need oxygen or water. Rationing makes my money stretch further but takes its toll on my body. If it's expensive enough then eventually I will run out of money and die. Sounds interesting but has nothing to do with the reality of living in America."

"For many Americans, healthcare isn't so different. Americans with limited or no health insurance are often forced to ration basic health care, preventative medical care and necessary prescription drugs due their limited budgets. Basic health care, much like oxygen or water, can only be rationed for a little while before it takes it toll on the body."

Phil nodded his head. "For basic healthcare and preventive medicine, free market capitalism fails just like it fails for other relatively inelastic survival items like water and oxygen."

"Exactly. If Red Bull starts charging $20 a bottle, I can stop buying it and my body won't suffer. If a regular check-up and basic blood tests costs me $350 and I don't make much more than that each week, I'll probably skip it. If I keep skipping basic health care, my body will eventually suffer."

Phil started walking away before I realized that I hadn't mentioned that sometimes free market capitalism works for healthcare. I made a note to bring it up next time.