The Logical Conclusion

About sixty years ago John Nash published a paper called "Equilibrium Points in N-Person Games". This paper changed modern economic theory in a very real way. While I certainly can't claim to fully understand his theories, and definitely can not explain that theory, I'm intrigued by the interaction between his theories, and the debates raging in our governmental system right now.

Someone who understands this better may correct me on my explanation of Nash Equilibrium here, but let me try to explain it to you in terms of a two person "game". Each person has a set of "positions" which he may select from, and each combination (from the two players) of positions, entails a certain pay off for each player. (winnings or losses) The players alternate turns changing their position, each attempting to maximize his payoff. A Nash Equilibrium of pure strategies exists if there is a position from which neither player wishes to move. In other words bother players have maximized their payoff. The key point is that it is not their maximum theoretical payoff. (Player A may be able to earn a higher pay off if he could force Player B to chose a position that was less advantageous to Player B) He has maximized his realizable payoff. For instance, if you are maxing a widget, you calculate that your max profit not based on what it would be if you could control the price charged you by your material suppliers, but based on the prices which the material supplier specifies for you.

That is Nash Equilibrium in a very very simplified form that does not deal with mixed strategies and many other subtleties, but hopefully will be sufficiently clear to support the following discussion. In a nut shell, Nash's theory says that the best possible outcome is not achieved by an individual player maximizing his own output, but by maximizing his own out put, and all the other players outputs.

Now from an economic standpoint, this is hugely beneficial. It is really a statement of the simple (and in my opinion obvious) fact that things work out better for everyone else when people cooperate. When to countries sit down reasonably and establish trade agreements, both benefit from the prosperity brought on by trade. This should be a reminder to us all the next time we feel like just being a jerk about something and not cooperating just to tick someone off. (I've NEVER been guilty of that)

But that's the rub isn't it? This only works in the abstract where people do not have feelings which can be hurt, beliefs which they will not violate, and rights which they value above monetary profit. What happens if one person decides not to play the game according to the rules? Well obviously for the system to work, there must be an enforcer. For the good of the majority who are all benefiting from this game being played by the rules, and possibly even for the good of this individual who will also benefit from playing by the rules, someone must have the authority to enforce. In a family this is the parents. If the kids are working or playing together and one child is ruining the fun for everyone else, that child can be disciplined in order to maintain a good environment for all involved.

I hope you can see where I am going with this, but I am attempting to develop it all as systematically as possible.

I want to now take a look at our health care system. This may seem like a completely random quantum leap to some, but bear with me and I'll hopefully make it clearer what that has to do with the previous discussion.

Consider, if you will, our entire health care system as an N-player game. The players are individuals, doctors, hospitals, and insurance companies. (You'll see why I left the government, and lawyers out in a few moments) There exists some equilibrium point of prices and services for this system where patients pay a certain amount for insurance, hospitals charge a certain amount for services, etc. etc. This is the system in its pure state. However, the problem is that we don't live in a mathematically ideal society. Let's start with the government. The government sees itself as the "enforcer". What they have done is, rather than leaving the rules of the game the way they naturally would develop, they step in and change the rules to make them "better". For instance, hospitals are required by law (rule) to provide emergency care for anyone that shows up, regardless of their ability to pay for it/have it covered by insurance. We could debate whether this is a good or a bad thing, but it's the rules. However, what this essentially does is change the payoffs for players. Now patients have the option, rather than paying into the system and obtaining the care they need, or simply saving their money for emergencies, of simply relying on the hospital care which they are guaranteed, regardless of if they can pay for it or not. You may have heard of this referred to as the "free rider" problem. The free rider drives the price up for all those who have bought into the system. What's the solution to this? Well obviously, from the standpoint of the Enforcer, the solution is to set up a new rule which says everyone must have insurance. That way, by including everyone in the system, Nash's principles once again apply, right?

Sort of. The problem is that this approach only is acceptable in the abstract. Take a look at what we've done. By applying principles and logic, we've constructed a system in which the government has the right, for the good of the masses, to tell you how you must spend your money. This is exactly communism. It abolishes private property and instead establishes a system where your property is only yours as long as you are willing to use it the way the government wants you to use it. Obviously this is only one small aspect of the system, but analysis of many others shows the same result. It is a principle which the founders understood, but which we seem to have lost sight of. To wit, government involvement which does not have strict unbendable limits put upon it, regardless of the area, leads to more government involvement both in that and any related area. It is a self perpetuating system to which the only logical result is total control by the government.

I mentioned lawyers earlier. I think the roll of lawyers in the health care system is drastically underestimated. Essentially what lawyers do is to manipulate the legal system and drag it in between the different players (in particular the patients and the doctors) and use it for personal gain by preventing cooperation between the players which is necessary for a beneficial outcome to all. Essentially their sales pitch to the patients is, forget the payouts that everyone else goes by, I can get you a much larger payout from your doctor by using the legal system. (They never mention the payout they are actually looking for themselves.) What this does is it seperates the patient from the doctor because now the doctor must constantly be in fear the he will be sued. The result is increased cost to everyone involved in the system. Insurance companies must pay more in settlements. Patients must pay more in insurance to cover the huge settlement costs. Doctors must pay more in insurance to cover law suits. Patients must pay more to doctors to cover the doctors extra insurance. The only beneficiaries are a small number of the patients, and the trial lawyers. But what I find interesting is that it is really an example of how Nash equilibrium DOES work. If cooperation between players is prevented, the result is that everyone loses.

Now considering my previous warning about government involvement, you may think it hypocritical of me to say that the government must execute reform in this area. But notice what I said. It is not that the lawyers are players in the system who are refusing to play by the rules. The lawyers are actually inserting the government into the health care system. So once again the problem is government involvement, though indirectly this time. What the government needs to do is reform its laws to prevent itself from being dragged into the mess.

One point which I intended to cover but skipped over was the immorality of government forcing participants into playing the game the way the government wishes them to play the game. (Telling doctors what tests they must run, how much they must charge. Telling insurance companies what premiums should be, who they must cover, and similar issues. ) But again, just briefly, it quickly becomes clear that the only way this can be implemented is by total control. If the government tells the doctor he must lower his price, he is perfectly free to simply leave, if that is more beneficial to him. (this is already happening btw) When this happens, then thte whole system starts to collapse, unless the government extends its power further to not only tell doctors how they must perform their jobs, but THAT they must perform them. And anyone that thinks we are actually all that far from that situation, is, in my opinion, simply fooling themselves.

Until next time...