08/11/2009 05:12 am ET | Updated May 25, 2011

Healthcare and Government's Role in the Economy

"The property which every man has in his own labor; as it is the original foundation of all other property, so it is the most sacred and inviolable... To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour is a plain violation of this most sacred property." --- Adam Smith, The Wealth of Nations

When the discipline of economics was born, and I use the term discipline advisedly, the objective was to justify concentration of capital, emphasizing, as many of its practitioners still do, the function of capital in economic growth. Capital is vital for economic growth, but somewhere along the blood line of teachers and students of capitalism, the horse was passed by the cart.

The chicken and egg metaphor of supply and demand has not seen any of the lighted and attended classrooms of a business school in a lifetime. If there is no demand, of what use is the supply enabled by capital? Want, or even desperate need, in the market for goods and services, is not demand if the products desired are priced too high. Demand does not exist if the potential consumer's financial resources are insufficient to buy.

In the health care crisis we see a confluence of forces that have created a market that excludes a large segment of the public because of affordability. Most, if not all, others that are not excluded at the basic level, are excluded at some critical survival level for the same reason. At issue is predatory and monopolistic practices by the health industry. Prices approach the point where providers can only raise prices if they are willing to lose patients. They can lose patients only if there are some that remain that can pay more. The logical conclusion of this is that health care will not only increase in cost, but will increase faster as the base of customers is priced out of the market, a positively accelerated increasing function of time. They are willing to lose patients, and their business models seem intractable on the goal of boosting margins at the expense of lives and limbs lost.

The unsung dirge of this health care nightmare is that health care increased in pricing even while their customers paychecks did not increase. And that is the real issue. Greed has won on both sides of this formula for distress, and the greed in health care is at least become a public issue.

What is not an issue, because it can't be, is the simplest and most sensible of all motives that every businessman, from mega corporation to ice cream street vendor, practices in good faith. In the effort to keep costs down and, therefore, profits up, wages are the most obvious place to cut costs. On an individual business basis it makes perfect, unassailable sense. As a systemic phenomenon, it is a death march for an economy.

Milton Friedman's tragically flawed work led us to abandon the most sensible of all economic equations. He prognosticated that if goods were cheaper, e.g. made off-shore, then profits could rise by allowing lowering wages across the economic board. He was right in the sense that short term profits could be increased, but neglected to think it through. Before him, and before the nation whose idiot President Reagan he advised, yawned a great abyss of Milton's making. If everyone lowers wages all the time, then the economy, necessarily, shrinks.

More fundamentally, Friedman contradicts the first principle of economics, that being that economies grow through productivity when productivity is shared with the working class. They do not grow, when as in the last thirty years, all productivity is appropriated as company or personal profit and then lies fallow. And fallow it is.

Capitalists, now, have more money than ever. The M2 money supply, that money that is not committed to recurring expenses, has grown at four times the rate of M1, the money in exchange in the basic economy. The Earth is swimming in capital. So much so that all it can find to do for a return is to try and corner commodities like oil and houses. Food, thankfully, is regulated to prevent speculative bubbles. There is no productive investment to be made with all that capital because there is no market for products that fewer and fewer of us can buy.

Government can act, and has acted, in the situation where capital accumulation and compensation goes out of balance. The role of government in this process has been abrogated by relentless opposition in Congress. Republicans have opposed minimum wage increases with the most desperate and shrill terror mongering possible. And the pity for them, and their constituents, is that in doing so, they actually harm their activist supporters, the very business people whose flawed understanding of systems leads them to think that they act alone.

The markets for goods and labor are complex. To have to resort to government intervention on wages is using a club with which to sew. The natural opponents of wage deflation are labor organizations. Government can act to redress the obstacles to collective bargaining erected by the idiot Reagan, and in so doing provide sutures to the economic hemorrhaging, a little at a time, instead of clubbing business to death for business' own excess supply of short sightedness.

In a free market system, pricing of both wages and goods should be unfettered, up to the point where harm is done. See Adam Smith, above. It is the role of government to see that no harm is done.