Is the 3-Body Problem Solvable in Economics?

The two-body problem is solvable in physics.  If we imagine a solar system that consists of exactly one star and one planet, it is possible to predict the planet’s orbit.  It’s not at all clear that the three-body problem is solvable.  Put one more planet in there, and it becomes very difficult to predict the orbit of either one.  Maybe impossible.

In economics, we are looking to optimize a transaction.  Note, a transaction doesn’t have to be perfectly optimal, it just needs to be optimal enough, in the sense that all parties are happy with the result.  So it’s not a question of whether I could have saved another $300 on the car I just bought, but whether me and the dealer didn’t feel we got ripped off.

The two-body problem in economics — where we are considering a transaction between one seller and one buyer — can be optimized.  If we assume that no party can hurt himself simply by walking away from a transaction, then an optimal solution is inevitable.  If the transaction happens, and both walk away happy, we call that strongly optimal.  A weakly optimal result happens when at least one party breaks even, and nobody profits at the other’s expense.  If both parties walk away, no-harm-no-foul.  That’s a weakly optimal outcome.

Question is, is the three-body problem solvable in economics?  Here, there are three parties to the transaction.  Of course it can; it’s entirely possible three people could sit down at the negotiation table and come up with a win-win-win.  Question is, is it guaranteed? 

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Norway vs. US

The other day, I got involved in a Reddit discussion about healthcare, prompted by a person who got a bill for $52,000 for an emergency appendectomy. The patient’s insurance company denied the charge, questioning the medical necessity (of an emergency procedure!)

The simple bottom line is that the asking cost of anything in the US is merely a point of leverage. Normally it’s used to negotiate with the government. This technique doesn’t work as well with private insurers, who know what the market is. Here, it’s being used to leverage the patient. From the insurance company’s point of view, the hospital is not the customer, they are a vendor. Screw em. The patient is the customer, far as the insurance company is concerned. Here, the hospital is putting pressure on the patient to blow up the insurance company’s phone lines, basically. Evidently it’s working.

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Market Failures and Public Goods

A fairly succinct definition of “public good.” Also, a cheap shot against an easy target.

Market failure is not unrelated to the concept of public goods; in fact I would submit that market failure is the more fundamental principle. All public goods are market failures; not all market failures are public goods.

An economist might be less interested in the notion of public goods, which is a political issue, and quite a bit more interested in market failures, depending on why they fail.

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What happened in the 70’s?

In a word, stagflation. We had to suffer through rising prices, and a poor economy with high unemployment, both at the same time.

Up until that time, such a thing was not thought to be possible. The theory was, rising prices is a sign of demand. If people are demanding all kinds of stuff, then business should be great, and unemployment should be low.

In certain economic circles, blame is placed on the government. Prices aren’t rising because we are demanding more stuff; they are rising because the government is printing too much money. On a broader scale, it is said, the government was debasing the money, which made it unattractive for foreign governments to sit on all the dollars we were sending them. So they started demanding gold instead. When we ran out of gold, we took ourselves off the gold standard and told everyone to choke it down.

Here’s the problem: the government does not actually print money. You do. The government does not.

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Minimum wage and the Urban/Rural Divide

Interesting comment on the Reddit Austrian forum, by an anonymous poster, on the impact of the $15 minimum wage:

This will do a combination of two things :

1st is that a flood of new workers that are actually worth $15/hr will enter the workplace to compete with those that are not. Housewives & retirees mostly. Teenagers will become unemployable and be forced into debt slavery as they go to college instead of the workforce. This is intentional I believe.

2nd is that jobs that cannot pass on the wage inflation to the consumer will be replaced with automation. More apps. More kiosks. Ultimately this is going to crush a lot of Americans who can least afford it, while helping those who need it the least.


My response:

The minimum wage is an economic loser, in the same general category as rent control. Most articles seeking to prove the opposite, instead spend time arguing how much you can get away with (why not go for an even $100?). Hidden costs are seldom discussed. This post pithily discusses the impact on marginal workers. I really like the idea that these workers will face competition by more experienced people attracted to the higher wage; I haven’t seen that discussed elsewhere.

The only critique, likely to be leveraged by minimum-wage advocates (who are these people?) is that there’s at least some slack in the system. From two sources.

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Moral Hazard in Healthcare — Part 2

I’m a guest worker (fully documented!) at two facilities: a suburban practice and a small city way out in the prairie. Both practices are booking a couple of months out, so there’s a line to get in both places. I get paid a bit more out on the prairie; I guess not everybody sees the beauty of that little city (although it is indeed beautiful).

In the suburbs, I mostly see trivial problems. The worried well. People who were already evaluated once and want a “followup” or second opinion. Anxiety. Minor problems that a nurse practitioner probably could have taken care of (while adding value in the process; NP’s are awesome). Out on the prairie, I’m seeing patients with critical or complex problems, most of whom probably should have been seen sooner.

Question: which facility needs to recruit a permanent specialist?

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Moral Hazard in Health Care — Part 1

I recently reviewed Steven Horowitz’s excellent “The Price System and Distributive Justice” (link.) In this article, Horowitz considers the effect of price shocks in healthcare, and in the setting of natural disasters. He makes a good argument that the price system works in the case of natural disasters. His argument on healthcare costs is less compelling.

Missing is a discussion of two key mathematical concepts: variance, and cumulative risk of ruin.

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Inflation in Healthcare — Part 3

Previously we discussed what inflation is, and whether fiscal policy can cause inflation. We looked at the Bennett hypothesis, which lays out the case (as yet unproven) that federal policy might be causing inflation in the education sector.

The federal government borrows 43% of what it spends, and it spent some 1.2 trillion on healthcare in 2019. CMS estimates the total market for healthcare was 3.8 trillion that year. So over 13% of all healthcare dollars come from federal borrowing. Is this inflationary?

It could be, just depends on where the government gets the money. Who is buying those bonds?

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Inflation in Healthcare — Part 2

In Part 1, I narrowly defined inflation as an increase in money supply. An increase in the number of dollars chasing a limited supply of goods and services, all other things being equal, will cause the price of those goods to be bid up. “Inflation” thus defined is historically a result of monetary debasement, although in modern times, in civilized countries, it typically comes about through expansion of credit.

Federal spending currently accounts for about a quarter of the GDP, about a third of that borrowed. The portion that is borrowed consists of newly-printed dollars, some of which are chasing targeted goods and services. Can fiscal policy thus result in inflation?

William Bennett, former secretary of education, suggested as much in a 1987 NYT editorial entitled “Our Greedy Colleges.”

If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase. In 1978, subsidies became available to a greatly expanded number of students. In 1980, college tuitions began rising year after year at a rate that exceeded inflation. Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.

William Bennett, NYT 1987

Here, he seems to be using the term “inflation” to refer to higher prices, a phenomenon he admits is multifactorial. But there seems little doubt he hypothesizes that throwing a great deal of money at a limited supply of services has a tendency to drive prices higher.

Sense then, there have been several studies seeking to disprove his hypothesis. All have limitations. A typical study seeks to correlate volume of Pell grants with tuition, showing inconsistent results. Such studies disregard the fact that colleges have several sources of income other than Pell grants and cash-on-the-barrel tuition fees. And invariably, these studies seem ignorant of the fact that loans are, by nature, inflationary.

Personally, I would be most interested in a study like this, which compares out-of-state tuition with per-person student loan debt:

Debt vs Tuition

To the extent these two lines are correlated, tuition increases are being funded by debt. Which is, by definition, inflationary.

Remember, there are only three ways to bid up the price of something:

  1. To dip into your savings for extra cash.
  2. To forego buying something else.
  3. To borrow money.

The tight correlation between borrowing and tuition suggests that the first two things are, to a great extent, not in play. To be clear, people do save for college, and their parents do make sacrifices. But that’s not what is driving tuition inflation in recent years. (One might hypothesize that real income, and real savings have been flat during this time period; and one would not be far from the truth.)

Hold on, you might say. What about all the extra people clamoring for college education these days? Doesn’t that affect the price of tuition?

That’s partially why I am comparing per-student debt with per-student tuition; but in a larger sense, you’re right. Of course it does. But you have to understand how the system works.

As more and more people demand education, they bid up prices and profits. This encourages new entrants, people starting up their own colleges to get in on the action. This tends to hold prices and profits down. Even so, prices may rise to the point where people figure it’s not worth it, and start looking to spend their education dollars elsewhere, for example in technical school. That reduces demand, thus putting further downward pressure on prices and profits.

So, you form a cartel and first approach the government about passing laws to keep the competition out. That helps. Then you beg the government for grants. And when that goodwill runs out, you lobby for lending. And once the lending starts, you’re dealing with pure inflation.

The key is, to keep the rate of education inflation above the rate of inflation for things college administrators want to buy. And of course it’s not all about the champagne and foie gras. It’s also about buying buildings and professors and such. They do have a business to run, after all. And you’re going to pay for it, one way or another.

This is no different than saying inflation in the housing market is being driven by the mortgage debt market, or that stock values are being driven up by companies borrowing money to re-purchase their own stock.

Where you see inflation, is where you are allowed to spend borrowed money. When banks are holding the strings, they tend to approve loans for specific things, like cars and houses. We can expect those prices to be bid up when loans are readily available.

When the government is holding the strings, it will tend to promote spending with borrowed money on certain things. The government itself will borrow money to buy jet fighters and tanks, and it should come as no surprise, those things are expensive. Here, the government is encouraging people to borrow their own money for education, with predictable results.

To be clear, fiscal policy and monetary policy are working hand-in-hand. The Fed is working to keep the cost of borrowing abnormally low (in other words, has set the price of money below the market-clearing price) thus resulting in inflation. Which sectors see that inflation is a matter of policy, and that’s true regardless of who is setting that policy: the Congress, the Fed, or both.

Part 3: how this applies to healthcare