Two Approaches to Regulation

There are two fundamentally different ways of thinking about complex social systems: the economic approach and the engineering approach.

Social engineers see society as disorganized, unplanned, and inefficient. Wherever they look, they see underperforming people in flawed organizations producing imperfect goods and services. The solution? Let experts study the problem, discover what should be produced and how to produce it, and then follow their advice. Social engineers invariably believe that a plan can work, even though everyone in society has a self-interest in defeating it. Implicitly, they assume that incentives don’t matter. Or, if they do matter, they don’t matter very much.

Yet to a commonsense observer, incentives seem to matter very much. Complex social systems display unpredictable spontaneous order, with all kinds of unintended consequences of purposeful action. To have the best chance of good social outcomes, people must find that when they pursue their own interests, they are meeting the needs of others. Perverse incentives almost always lead to perverse outcomes.

As I discuss in my new book Priceless: Curing the Healthcare Crisis, in the 20th century, country after country and regime after regime tried to impose an engineering­ model on society as a whole. Most of those experiments have thankfully come to a close. By the century’s end, the world began to understand that the economic model, not the engineering model, is where our hopes should lie. Yet healthcare is still completely dominated by people who steadfastly resist the economic way of thinking.

As I see it, healthcare is a field that can be described as a sea of mediocrity punctuated by islands of excellence. The islands always spring from the bottom up, never from the top down; they tend to be distributed randomly. They are invariably the result of the enthusiasm, leadership, and entrepreneurial skills of a small number of people. They are almost always penalized by the payment system.[1]

Now if you think like a commonsense economist, you will say, “Why don’t we reward, instead of punish, the islands of excellence and maybe we will get more of them?” But if you think like an engineer you will reject that idea as completely unacceptable. Instead, you will try to (1) find out how medicine should be practiced and (2) find out what type of organization is needed for doctors to practice that way, so that (3) you can then go tell everybody what to do.

Here is Harvard Medical School professor Atul Gawande, explaining how medicine should be practiced:[2]

This can no longer be a profession of craftsmen individually brewing plans for whatever patient comes through the door. We have to be more like engineers building a mechanism whose parts actually fit together, whose workings are ever more finely tuned and tweaked for ever better performance in providing aid and comfort to human beings.

Here is Karen Davis of The Commonwealth Fund, explaining (in the context of health reform) how medical care should be organized:[3]

The legislation also includes physician payment reforms that encourage physicians, hospitals and other providers to join together to form accountable care organizations [ACOs] to gain efficiencies and improve quality of care. Those that meet quality-of-care targets and reduce costs relative to a spending benchmark can share in the savings they generate for Medicare.

The ACA was heavily influenced by the engineering model. Who, but a social engineer, would think you can control healthcare costs by running pilot programs? They are a prime example of the social engineer’s fool’s errand.

[1] John C. Goodman, “It’s Still Not What I’m Looking For,” John Goodman’s Health Policy Blog, February 20, 2009.

[2] Atul Gawande, “The Velluvial Matrix,” New Yorker (blog), June 16, 2010.

[3] Karen Davis, “How Will the Healthcare System Change Under Health Reform?” The Commonwealth Fund Blog (blog), June 29, 2010.

Note: Cross-posted at Psychology Today blog, “Curing the Healthcare Crisis.”