Under a free enterprise system, given enough competition, the prices of things will naturally find their minimum, which is the smallest amount for which people are willing to perform the task. Food in the grocery store includes the minimum amount for which someone will grow, pick, ship, process, wholesale, and retail it. The reason is that if it is not at its minimum price and someone is willing to take less, they’ll drop the price and take business away from others unless those others drop their prices as well. While there are some small differences in prices for things like food, related mainly to the way products are being marketed as a group, things within a given market are all priced relatively the same. Even stocks are priced to provide the minimum return someone is willing to accept for the risk he is taking.
Also factored into the price for products in an open market is the ability of people to pay for the product. Even if you were the only one selling a product, if you priced it above what people were willing or able to pay, you would sell less and reduce your profit. For example, if you tried to sell ice cream at $20 per come, even if you were the only food vendor around for miles, you wouldn’t sell very many. You would make a much bigger profit selling at $10 per cone because you would sell more cones, and you might do even better at $8 per cone or $5 per cone. Drop the price too low and you would still sell more ice cream, but would make a smaller profit because you would be making less per cone.
In the case of the ice cream cones, if you had a monopoly the price you would get would be based on how much people wanted the ice cream. No one really needs ice cream and they’ll just say “no, thanks” or use some more colorful language if you charge a price that is way beyond reason. If you are selling something people truly need such as medicine and you have a monopoly, the amount you can charge is based upon what people are able to pay. For example, if you were selling bread and there was no other food to be found anywhere, you might be able to sell it for $100 per slice because many people would have a few hundred dollars to spend and they would need to part with their money or starve. Try charging $100,000 per slice, however, and you’d see your sales drop off even if people were starving because most people simply couldn’t afford to pay the price.
When you introduce Socialism, where you force people to pay for things for others, you short-circuit this second price control. This has happened in America for two of the more outrageously priced services, college and medicine. In both cases, they are critical goods that have prices that have risen to the point where most people cannot afford to pay full price, and way the markets are structured has caused them to be an effective monopoly. In the case of college, there is a high sticker price that most people complain about, but the price people actually pay is based on what they can afford to pay. This is usually far less than the sticker price since colleges collect financial aid forms and give out “scholarships” based upon family situation. Note that student loans have caused list prices to go even higher since people can pay over many years rather than needing to show up at the door with a handful of cash. This has prevented universities from needing to control costs, so they think nothing of keeping professors on the staff for many years after they have stopped teaching, building lavish student centers and exercise facilities, having private planes and mansions for the university president, and retaining a large staff of executives with six figure salaries. If their costs increase, they simply raise tuition and put more people on scholarships and loans.
In the case of medicine, hospitals charge a large sticker price, but then accept less from most people, based on either negotiated rates with insurance companies or what the consumers themselves are able to negotiate after being threatened with collections. Doctors often bill far more than they expect to receive, knowing that if they bill too little they may not get back what they need to cover costs and have a reasonable profit when they are paid by the insurance company. Most doctors will gladly give a lower price if you are willing to pay cash and not use insurance, partly because they don’t actually need to be paid the list price to make a profit and partly because it saves them the trouble of billing the insurance company when you pay directly.
Hospitals will do the same, but generally they first need to believe that you don’t have the ability to pay the full bill. This leaves consumers who have some savings in danger because they may need to pay the full, outrageous list price. Just as student loans make tuition bills go higher, medical bills are higher than they would be if everyone just paid out-of-pocket. Because people use insurance that is paid for over their entire working careers, people are paying for healthcare over many years rather than all at once, so they are able to pay more than they could if they needed to pay the whole bill at once. The threat of facing a high bill if they don’t have insurance forces consumers to buy insurance, making prices go up for everyone.
It is coincidental that college and healthcare are two programs that are targeted for being converted to a Socialist system in the US since both already are paid for in a Socialist method. This is exactly why they cost so much – people who are able to pay more are paying for many others who pay less. Note that other things people really need – food and clothing – are reasonably priced because most people pay their own way. Imagine what a hamburger at McDonald’s would cost, however, if you had to pay for ten other people. As fewer people pay full price, the price that those are paying increases, making it so that fewer people can pay full price. This cycle continues until fewer and fewer people are paying full price. So the price of things under a Socialist model is, “All that you have.”
So the question then is, if medicine and college cost so much because they are already socialized in how they are paid for, where the cost is basically “all that you can pay,” why would anyone want to socialize these functions further?
If you want tuition bills to drop, get rid of student loans. The Federal Government, and private institutions such as university alumni associations could (and would) still offer need-based financial aid to those who truly cannot afford the price. Because increases in tuition would result in lower enrollments and less money for the revenue, universities would trim out the fluff to reduce their costs and thereby their prices. People in the middle class, who could afford to send their children to college if they were only paying for their own child (and if the university needed to set affordable prices or see their enrollment drop), would start just paying the bills like they do for everything else. Parents would start saving for college because you wouldn’t see financial aid drop if you saved up money and there wouldn’t be the feeling that if you save, you’re a sucker because you’ll just pay more and get the same product as everyone else. Parents and students would find ways to reduce their costs, like spending a couple of years at community colleges and taking more classes per semester to get out faster. Everyone would graduate without student loans.
If you want healthcare costs to drop, get rid of all but major medical insurance, and require that everyone have major medical insurance (insurance that pays when you’re in the hospital and incur tens of thousands of dollars in costs). If everyone going to the doctor were just writing a check, there would be a lot less hassle and it would be a lot cheaper. Sponsor competition by publishing prices so that one place doesn’t charge $1000 for a procedure another is charging $250, and prices would come down. Eliminate the stranglehold that the AMA has on the number of doctors who are enrolled in medical schools, and costs would come down. If you then add the requirement that everyone contributes 3% of their pay to an HSA, such that they would have the money to pay their own medical bills, people wouldn’t be paying for everyone else, so costs would come down.
Socialism drives the prices of everything up and drives quality down. Free markets and personal responsibility drives prices down and quality up. More Socialism isn’t the solution to make college and medical care affordable. Free enterprise is.
Got and investing question? Please send it to firstname.lastname@example.org or leave in a comment.
Follow on Twitter to get news about new articles. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.