IAN McAULEY. Reframing public ideas Part 8: Choice

Market-based capitalism, we are told, brings us choice. But often “choice” is within a limited range of similar products and services. In the name of supporting markets we can be denied the choice of being able to share services with one another, and the choice of opting out of markets.

A fast-food shop in suburban San Diego offers hamburgers with a choice of seven different bread buns, each type toasted or plain, eleven sauces, three types of meat (organic, Angus, Wagyu) in single or double serves, three types of fried onions (or none), three types of jalapenos (hot, medium, mild or none), and six types of cheese.

That’s 88,704 options.

And that’s the cornucopia of capitalism. Choice. The consumer, not the paternalistic company or the Ministry of Production, is sovereign. He or she is in control.

At least that’s the rhetoric when we are invited to contrast the vibrancy of capitalism with the grey misery of central planning. Who can forget the movie Good Bye Lenin, with the constrained choice in East Germany – Spreewald Gherkins, Mocca Fix coffee, Vita Cola and Rotkäppchen wine – contrasting with the more than 50,000 food and grocery products (not including fresh produce) available in free-market economies such as West Germany and Australia.

The story is more complex – but not as complex as buying a hamburger in San Diego.

For a start, choosing between alternatives involves effort. It’s much easier to ask for a “hamburger with the lot” (still on offer in Crookwell NSW) than to go through the process of specifying a hamburger with “sesame bun – not toasted – Angus single – caramelised onion – mild jalapenos –  Swiss cheese”. Research in behavioural economics shows that consumers welcome choice up to a point, but beyond that point they suffer “choice overload”. Adding more options is likely to drive customers away, who cannot be bothered with going through the process. We have better things to do with our time than designing a hamburger.

Choice

Quite often “choice” carries no benefit for us. One of the more absurd innovations in recent years has been choice of electricity “retailers”, which really means choice of which company sends you a bill, because these companies have nothing to do with the physical product (they’re financial intermediaries), and in any event you want your electricity delivered at a vanilla 50 cycles, 240 volts. They don’t really offer choice of electricity. Electricity is delivered, as it always has been, through the distribution monopolies.

The theory is that the “retailers” compete on price, but using clever tricks such as “confusopoly” (think of all those bundles and conditions) and trusting consumers not to spend too much time shopping around, there is little effective price competition and the “retailers” are still making high profits.

Health insurance is another product offering choice without variety. Those who want health insurance are offered look-alike products from financial intermediaries. In part this is because the industry is heavily regulated, which results in diminished choice (for example insurers cannot offer insurance with more than $1000 of front-end deductibles). Also, as with electricity, health insurers are masters of confusopoly. But even if insurers were behaving ethically it is also a market in which people find it extremely difficult to make any rational choice, because it is impossible to assign any meaningful estimate of one’s future health care needs.

That’s not the only way in which our choice is constrained in health insurance. Those with incomes above the threshold for the Medicare Levy Surcharge ($90,000 single, $180,000 family) face financial penalties if they do not hold private hospital insurance. This means their choices are limited in two ways.

First, they are penalised if they opt out of insurance because they prefer to save for their own contingencies and buy private care from their own means. They have to pay the surcharge and are denied the rebate (currently 25.9 per cent) which they would have enjoyed had they held private insurance. Their option of acting in the market as self-reliant agents is discouraged.

Second, if their preference is not to hold private health insurance, but to share their health care services with other Australians, their choice is similarly discouraged. Not everybody who is well-off wants a two-tier health care system – one for the well-off, one for the “indigent”. A desire for a single system may be driven by a sense of solidarity, or a moral disgust at being given an offer to jump the queue. Or it may be driven by a realisation that one’s fortunes change over time, and that it’s safer to have a shared high-quality system, because systems designed for the “indigent” lose their well-off supporters and deteriorate.

We see a similar situation in school education. There are good reasons for people to want their children to enjoy education in socially-mixed public schools. But when the reasonably well-off, encouraged by subsidies for private education, drift away from public schools, those schools start to lose a cohort of children and their parents who help to sustain the school’s standards, and an irreversible segregation is set in chain. Government policy has denied choice to those who value social mixing. (Among high-income “developed” countries, Australia has one of the highest proportion of students in private schools.)

In another case of government paternalism we have been told that we should accept slightly lower taxes to a proper broadband network.

We may not have an East German-style Ministry of Production deciding what we can eat or what sort of car we can buy, but our governments do many things that paternalistically constrain our choice.

In spite of general opposition to privatisation, we have been treated to a bipartisan paternalism which has seen privatisation of huge parts of our economy. Some of these privatisations, most notably airlines, have been in the face of changed economic conditions, but many have stemmed from a paternalistic dogma that Big Brother government knows what is best for us. Some privatisations, such as the Commonwealth Bank and technical education, have been disastrous. Others, including airports and electricity networks have transferred publicly-owned  natural monopolies into private hands, resulting in economic inefficiencies and huge unearned profits for infrastructure owners. And some, such as toll roads, have been absurd by any criteria.

But they have gone ahead because our paternalistic governments, oblivious to our wishes, have determined that privatisation and “small government” are good for us. So much for choice.

 

This is the last in a series of eight articles on re-framing public ideas, published over January 2018. Others have been:

  1. Leadership, posted on 3 January.
  2. The role of government, posted on 5 January.
  3. Economy and society, posted on 9 January.
  4. Economy and environment, posted on 11 January.
  5. Competition, posted on 15 January.
  6. Jobs, posted on 18 January.
  7. Capital, posted on 23 January.

 

 

 

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Ian McAuley is a retired lecturer in public finance at the University of Canberra and a Fellow of the Centre for Policy Development.

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