An Interview With Kenneth Arrow, Part Two

[UPDATE: part three is here.]

Part one is here. There is one more part to come, which I'll post tomorrow. Part two, which is pasted below, is mostly about health economics. Arrow wrote the definite modern health economics paper -- "Uncertainty and the Welfare Economics of Medical Care"; I believe the PDF is here -- which is required reading for every student of the subject. My questions are in bold.

Conor Clarke: I wanted to ask about health care. As I'm sure you know that the House and Senate are...

Kenneth Arrow: It keeps on changing! I never quite learn all the provisions. But I do follow it, more or less.

Well, that's OK. I'm more interested in the famous paper you wrote in 1963 on the economics of medical care -- the paper that identified a lot of the big problems that afflict the market for health care.

Yes. In all modesty, I do think that paper changed a lot of people's opinions

Well, tell me about the origin of the paper. And do you think it's relevant to the current situation? How much of it is still an accurate representation of the problems the health market faces?

I think the fundamental questions are the same. I also think there are more problems in the market today than when I wrote the paper. But I think the basic analysis hasn't changed. There are wars over the details but the basic analysis is accepted.

Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won't work -- it doesn't work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren't self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of healthcare, and that has led to some of the problems we have today.

But the basic problems are outlined in the paper. The common theme is that some people in the health market know more then others.

Information asymmetry.

Yes, that's the key. I started working on this thing when I was commissioned by the Ford Foundation, which had an idea to do economic analyses of policy problems. It was health, education and welfare, really -- welfare in the sense of programs designed to help poor people. And somebody had the idea -- Victor Fuchs, who is a colleague of mine -- to get economic theorists to work on these policy problems.

And in the case of health care that was you?

Yeah, he called me up and wanted know if I'd do it. And I wanted a challenge. Some of my best work has been from someone asking me to work on a problem I've never thought about before! Being a theorist, people think you might be useful in a practical area. So I did the background readings caught up on the health materials.

One point was that health is a random event. It's not like buying automobiles. Whether you're sick or not is hard to predict. Some get sick and some don't. That uncertainty makes it an ideal scenario for insurance. Some houses burn and some don't, but you know whose. So you have fire insurance. (And by the way, financial problems have the same characteristics, and I was always interested in the subject -- the uncertainty.) But the question that I started with was why health insurance coverage was limited. There was virtually no insurance outside of hospitalization, which was limited and heavily taxed. When I heard about this myself, it was just as a consumer. My first health-care plan as a professor had a $15,000 ceiling. A ceiling? I was thinking that should be a floor! $15,000 I can handle, but above that... it would be a problem.

Anyway, that was the nature of insurance. It was a cautious time for insurance, and the question was why. And then it occurred to me that the insurance company couldn't be sure about what it was getting involved with. It's not like a fire when you know the problems: Did you set it? How did it happen? It's all pretty definite. But in the case of health care there are three players: the insurance company with the health plan, the physician, and the patient. The physician presumably has a better knowledge of what the patient needs -- at least better than the insurance company does. So the insurance company could never put together a bill. There is also a Physician and patient relationship, but the physician knows more than the patient.

Presented by

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.

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