Why do Economists get it so Wrong?

Note: For some reason I am getting large numbers of people coming in directly to this page, which suggest that it has been a worthwhile post and is generating considerable interest. However, it is an unusual entry point to this blog, and the post assumes that you are one of the regular readers. As such, I would ask for your forbearance, as it assumes an element of knowledge of previous posts (having the effect of creating a strong interest in what is explained). As such I have not made it as easy as I might have. However, if you do stick with the post, it does stand alone, and may prove to be a revelation about the functioning of the today's economy, and why the UK and the West are in trouble . Alternatively, you may wish to start with the rather neat summary provided by a commentator at the end of the blog ( just scroll down) before returning to the main entry. You may also want to take a look at the post 'The Cigarette Lighter Problem' for a (perhaps unusual) context on the problem that the West faces, and this will help in clarifying why I am suggesting the UK (and the West) is in such deep trouble.

Original post starts here....

Today, I will make a rather belated (apologies for this) reply to a comment from a few days ago in response to my post 'Can the Economics of the Past be used to Predict the Future?' The comment was as follows:

'However, I still keep hearing 'experts' being quite complacent about the situation. On The World This Weekend at lunchtime Vicky Redwood, economist at Capital Economics, said that the reluctance of banks to lend to each other meant we might have a "technical recession" but hopefully not as bad as the early 1990s. (I asked around, and in my circle, nobody could remember the recession in the early 90s!). Another expert seemed to be suggesting that the problem is a "contagion" spreading through the economy, which makes it sound less than a fundamental problem.

As I understand it, both of these analyses are very shallow (only looking at the symptoms, not the causes), and these experts tacitly admitted that they are having difficulty making accurate forecasts. It made me wonder whether it ever occurs to them to step back and look at the 'bigger picture'. I suspect not.'

I did not see the interview, so I am unable to comment on the specifics of what was said. However, I think that this comment captures one of the problems of current economic thought. The world economy has changed significantly since the early 1990s. I have given an explanation for why this is the case in my post 'The Root of the Problem'. My argument is that there has been the development of a situation in which there is a massive over-supply of labour in the world economy, and that this makes the critical difference to the way in which the world economy is operating.

It may be worth reiterating how this provides a problem. Imagine that there are three factories that use commodity x, and the factories use a total of 100 workers (workers have a particular meaning outlined at the end). Each worker uses 1 unit of commodity per week in order to produce up to 100 units of product z. There is demand for 98 units of product z. There are 3 commodity companies who together can extract up to 105 units of the commodity per week. As such there is an oversupply of the commodity and a very small oversupply of labour, and this helps keep prices down.

Then something changes. It starts with one or two extra workers becoming available, and a new small factory is built to utilise their labour. Each of the new workers can supply half a unit of product z, but only adds a quarter of a unit of demand for product z. Initially, this is not a problem. They make very little impact upon the supply and demand, though their ability to produce more without greatly adding to demand holds down the price of product z.

However, because they can make the product z without demanding so much of product z in return means that this prevents the three original factories from raising their pay to their workers. As time goes on, the one or two extra workers start to increase in number, and as time goes by, they start becoming better at production so that they can produce just under 1 unit per week per unit of labour.

This is all fine, but suddenly there is a little too much of the product being made. The price of the product starts to drop, and with the drop demand overall increases, as more people can afford more of product z (including the workers in the new factory). The three original factories start to struggle, as they have too much labour. The price has fallen with the increase in supply, but their workers demand too much of product z in return for their labour, in comparison with the new factory. They realise that they must lay off workers, until such time as demand for product z increases to the point where prices will rise enough to give their labour what they demand.

As fast as the original companies lay off workers, new workers are appearing at the new factory. As each new worker is added, there is a new pressure on the price as the lost production capacity is replaced with labour that demands less of the product in return. Meanwhile the overall demand for the commodity is rising, along with demand for product z, as more workers can afford to buy it. The commodity extraction company notices that demand is rising and starts extracting more, but each week only add a fraction of a unit of the commodity to supply, such that supply in comparison to demand is slowly falling.

Furthermore, as it is apparent that a new factory offers the ability to produce the product more cheaply than the original factories, a trend of building ever more new small factories starts. Add to this that the new factories have improved on the amount of product z that each new factory produces per worker, and that the amount of the product z that the new workers are demanding for the labour is increasing slowly, and the situation sees a further escalation in demand.

The question here is; what happens next?

We have an ever increasing number of units of product z being produced as the original factories laying off of staff lags increases in supply (they are responding to the market signals), and we have an ever increasing supply of labour that wants comparatively less of product z per person, and we have an overall increase in supply of, and demand for, product z in comparison to the increase in supply of the commodity.

I was tempted to do this as a formula, but would rather let you use a heuristic/estimation approach (in part because I do not have the time, in part because it is clearer if you think about it).

We have several problems in this scenario. The first is that, as workers are laid off, there should be a decrease in demand for product z. In the real world this is not the case and the question is how this can be so? The other problem is that, where commodities are not keeping up with demand, what happens when commodity supply can no longer meet demand?

The second problem is relatively easy. With only so much increase in supply of the commodity, there will be a situation in which there will one day be excess capacity of labour in relation to the supply of the commodity, in particular in a situation where more and more workers are being added. This is the situation today. In this situation, only the factories that can manufacture product z with the least demand from the workers for product z will be able to to be supplied with the commodity. There is only so much of the commodity to go around, and only the most efficient factories will survive.

The other problem is that with only so much of the commodity, for a while, there will be an increase in the cost of the commodity, and therefore the price of product z will increase, thereby lowering demand, as the product becomes more expensive. In part this is offset by the increase in labour keeping demands for return for labour low, and the greater productivity of the new labour, but eventually the increase in the price of the commodity outstrips these factors.

Now, in a perfect economic world, what should have happened is that, as the new factory opened and commenced production, the workers in the original factories should have reduced their demand for so much of product z in return for their labour. Instead, they continued to demand the same amount of product z, and this led to their factories progressively shutting down. As this happened, there should have been a drop in the demand for product z, but this did not happen. Here is the mystery of the world economy. How is it that demand continued from the original factory workers? It does not make sense.

We are now in a position where one of the original factories has shut down completely, the remaining two are much smaller, and there are a mass of new factories. Available labour has now outstripped the capacity of the commodity. The price of product z has started to rise dramatically, and demand is therefore falling back. Sill the mystery remains of how it is that demand did not adjust with the closing of the original factory and the lay off of so many workers from the original factories.

It is here that we come to the 'economic miracle' of the last ten or so years. The new factories could produce product z without so much demand for workers for their labour of product z. This gave them a greater surplus per worker, and they then invested this surplus. Furthermore, as the commodity producers enjoyed ever greater demand, they made ever greater profit, and also invested this.

We now need to step away from this simplistic explanation, as it can not explain what happened next. This investment is the surplus generated from the emerging economies such as China, and the profits of the commodity producers. They invested this money into the governments of the West, and the Western consumers, thereby delaying the day when demand for product z would drop. It is only now that the supply of commodity is inadequate for the supply of available labour, that the problem has come to light. Demand should have fallen back a long time ago, but was propped up by bad investment of the surpluses that were created. Without a commensurate increase in supply of commodities, the growth could not continue. and without a lowering in demands from labour in the West, they were going to lose the competition for the allocation of the commodities.

We now have a mess. The west is in debt, prices are rising, demand is falling. The amount of commodity is only 120 units per week, but the number of workers is 140 and still growing. Someone somewhere is going to lose out. The amount of commodity per worker has fallen, and is falling further, despite the amount of commodities overall increasing. As such, the world as whole is richer. What has changed is that, whilst the world as whole is richer, the original workers must accept that the distribution of the commodities has changed.

When the original factories were in the West, they were using nearly all of the commodities, and were therefore the primary beneficiaries of the commodities. When the emerging economies entered the market, then the amount of commodities per worker was redistributed, such that some of that share was being transferred away from the West. Had commodities kept up with demand, then eventually (albeit with some painful adjustment along the way) everyone in the West could have remained wealthy, and the rest of the world become wealthier. However, in order for this to be the case, then there needed to be an increase in supply of commodities such that every single worker has the same amount of commodity per worker as we had in the beginning in the original scenario.

In other words, the only way that everyone could have won was to have exactly the same level of commodity extraction and production per worker as at the start of the change in the world economy.

The reason why economists have got it so wrong is that they have ignored the fundamental problem in the world economy. You can only grow the world economy if you have the raw materials to provide the means for growth. If not, then the raw materials will simply be redistributed. Redistribution means winners and losers.

It really is that simple.

Note: If anyone would like to do a scenario with all the numbers to illustrate the point, then this will be welcomed! Just add it as a comment, and I will publish it (it may also reveal some faults with my scenario?)

A note added to the post later: I mentioned that, as more labour enters the market, and commodity extraction increases, the world will be getting richer. I perhaps did not make one point clear enough. The overall wealth of the world on average has increased, but the likely outcome is that the wealth of the West will, on average, decrease. As such, whilst the world gets richer, a share of that wealth will be redistributed to the emerging economies such as China. In crude terms if we say that each of our Western consumers averaged a usage of 1 commodity unit per week, then the world must produce the same additional amount of that commodity for each new worker for everyone to reach the wealth of the West at the start. Where there is only 0.6 units of commodity per worker, then not everyone can be as rich as the West at the start. The question then arises as to how the new commodity per worker will be shared amongst different workers. More to the point, what happens when ever more labour is pouring into the market?

I should also clarify that a worker is a person with sufficient capital and infrastructure supporting their entry into the world labour market.

Another Note added 8 August: I just thought I would mention that I have been guilty of implying that the key differential between the emerging economies and the West is wages. It is not just wages, but all of the other 'benefits' that come with living in the West that are also part of the differential. These are structural problems. I address this issue in a rather unusual way in my post 'The Cigarette Lighter Problem'.

As Expected - The UK Economy is Collapsing

For the regular readers of this blog, they will be familiar with some of the predictions made in my essay 'A Funny View of Wealth', and some follow on posts that I have made in which I have discussed other aspects of the economic outlook. It is a while since I have looked at the 'big picture' so a brief review seems to be in order.

The first point to make is that, as predicted, house prices are not just falling but plummeting, and this was very much in line with predictions for this period in time. However, my prediction was, and remains, that they have a long, long way to go down still. In a later post I suggested that my already extremely gloomy predictions were too conservative, and I would suggest that my later more pessimistic outlook is more realistic. I do accept that there may be a very small upward blip at some point, a false recovery, but see the chances of this diminishing with time. However, there are still a few optimists out there, but I would suggest that such optimism is self-delusion.

Another element in the downward spiral that I predicted was that consumer confidence would evaporate, which is now the case, and that this would start to hit the service sector hard and fast. The knock on effect of this would be that many businesses would start laying off workers and that unemployment would start to rise. I mentioned the likelihood of the Central European workers going home or to other parts of Europe as the economy contracted and other labour markets in Europe were opened, and that this would ameliorate the rise in unemployment. As predicted unemployment is rising, the Central European workers are going home in large numbers, and unemployment is not rising as fast as would be expected in a sinking economy. However, also expect the rate of rise in unemployment to increase more quickly in the coming months. Whilst the return of immigrants can dampen the effects, it will not be enough to hold back the tide.

The predicted (and inevitable) rise in personal insolvencies is well under way, and will also accelerate with unemployment, with further stresses on finance caused by inflation in oil and food prices (both of which I did not predict!), as well as higher taxation. Expect a personal loan and credit card debt meltdown in the coming months. It has already commenced in the US, and the UK will soon follow. The banking sector is about to enter the second credit crisis, and banks such as Royal Bank of Scotland are already showing their vulnerability. Expect more runs on banks - Northern Rock was just round one, and round two will be even more ugly. The second round will see mortgage defaults rising with a sinking market providing negative equity, personal debt rapidly turning sour, and business insolvencies all hitting together. The banking system is toxic (spread your risk over several institutions, and make sure that you can move your money fast using online banking).

As expected business insolvency is rising, and as expected it is hitting the service sector first and hard (as well as house builders). Expect these numbers to now accelerate hard and fast, in particular pulling in the retail sector. The whole UK economy, as predicted, will be pulled down with the service sector and this is already taking place. The destruction of businesses is only just starting - prepare for much worse to come. If you are wondering where to put your money, keep out of retail, banking, and anything to do with leisure, excepting those companies that service home leisure. Solid exporters with unique technologies are the safest bets.

As for Sterling, I suggested that this would also start to fall, which it is doing (if you will excuse the metonymy), even against the US dollar, which has been tanking. I stick with my prediction that it has a long way to go yet. As confidence in the UK falls, it will fall off a cliff. I would suggest that there will be a steady decline for another couple of months, and then a steep drop.

As predicted the drop government receipts are making havoc with government finance, and this will get much worse as the economy sinks further. As I have predicted in a previous post, cap in hand to the IMF appears to the the likely scenario in the near future, though not for a while yet. I am really not sure that many people are aware yet of the Tsunami about to hit government finance, but it will be very ugly indeed. To misuse Alistair Darling's phrase, we are uniquely misplaced to weather the economic storm.

In other words, the UK economy is following the path that I predicted. As such, if I have been right before, I have to accept the uncomfortable idea that I will be right about the next phase of the collapse. This is not a pleasant idea. I am afraid the next phase is one of acceleration of the downturn, as each negative reinforces the others. The only remaining question is to ask at which point will other countries lose confidence in the UK economy? This is a matter of sentiment, of feeling, of intuition, of 'groupthink', and therefore hard to predict. It is when the sentiment goes that the banks will start failing, and the IMF becomes the saviour. I think that this is not far off, but am slightly less certain than in my previous predictions that this will be within 6 months. However, this is only a case of slightly less certain.

Not a happy post, and I have a feeling they will become ever more gloomy in the coming months.
Note: When I discussed the Chinese economy I suggested that China may be able to weather the world economic storm, but also suggested that China is on a knife edge on this subject. The early news is suggesting that China may not be that resilient. In my post I pointed to worries about their banking system and construction. It appears that these worries may have been well founded. See here for why. Having said this, I am still not confident to jump one way or another. China has many economic strengths, and may pull through this okay, although it will certainly feel negative effects of the global downturn.

At some time I may talk in detail about the US, if there is interest from readers on this subject.

Rectifying Health Care Costs - No More NHS

I have mentioned that, over time, I would post some ideas on how to make structural reforms to the UK. I have already covered education, and the next big area of government expenditure I want to cover is that of healthcare. The solution I have outlined is radical, which may not surprise regular readers of this blog (who seem to be rapidly increasing in numbers).

The National Health Service in the UK has taken on the status of being untouchable. As such, I write this in the knowledge that such a system as I am proposing will only be considered in extremis. However, extremis is what the UK is now potentially facing, so I will detail a new system on the basis of putting the idea 'out there' in the hope that it might provide inspiration, or at least help people consider that there are other ways of running a health service.

Like any system, the one that I am proposing only makes sense as a complete entity, so I would ask that you stay with the idea to the end. Do not rush to judgement at the early stages, as the system is not what it seems at first. As for my post on education reform, the system offers a market based solution, and aims to remove as much government control from healthcare as possible.

I will not detail the many criticisms of the healthcare system here, except to say that the arguments normally revolve around the bureaucratic nature of the system, cost, efficiency and quality of care. A particular criticism of the moment is the use of top-down targets, which distort priorities and outcomes. My aim is that my proposed system will address all of these issues.

I will start with a shocking statement. The system I am proposing will cost people money for their treatments. However, before recoiling in shock, you should be aware that nobody will be denied treatment.

To best explain the system, I will start with an individual who thinks that they might be ill. We will call the patient Fred. Up until today, Fred has been very healthy, and has therefore never utilised the health system, so he has not even registered with GP (doctor). Unfortunately, Fred has not been feeling well.

His first task is to therefore find a doctor. He goes online and searches for a doctor and finds a directory of all the doctors in his area. The directory lists the details for the doctors along with ratings for each of the doctors. There are two kinds of ratings; rating from patients, and ratings from consultants, both of which are shown as stars. The search also includes the hourly rate that the doctors charge, and whether the doctor is taking on new patients. Fred is a middle income manager, so he chooses a doctor with middle level hourly rates, and a good rating from his patients and consultants. He telephones the doctor's surgery and makes an appointment. In order to confirm his appointment he needs to present his government health card to the surgery, and enter a PIN to confirm his registration.

Having popped into the surgery with his health card, he is now registered with the doctor. A couple of days later he has an appointment with his doctor. The time that he enters the doctor's office is taken through his swiping his health card, and entering his personal PIN. He sits down with his doctor. The doctor conducts an examination of Fred, and concludes that he does have a problem. He is concerned, but not overly concerned. He thinks the best option for treatment is a course of drugs but, if that does not work, he will require some minor surgery.

The doctor prescribes the drugs, and Fred enters his PIN before the doctor can issue the prescription. The doctor updates the notes on the computer in front of him. At the end of the consultation, Fred swipes his card, and enters his PIN again. His time spent with the doctor is recorded. He is then taken to a room, where he is left alone with a computer. The computer asks him to rate the service that the doctor has provided.

At this point, you may be puzzled. What is going on here, and how is this different from private medical care? The difference is explained below.

When Fred chose his Doctor, he selected the doctor in part on the hourly rate that he charged. When Fred registered with the doctor, he accepted the hourly rate as part of the registration. This acceptance was recorded, and he then opened a government health account. In doing so he was making a commitment that up to a maximum of 5% of his income would be deducted each month to pay off his medical bills (achieved through the taxation system). The cost of the visit to the doctor was entered into this account, one of several health accounts. The following month, up to 5% of his income will be taken to pay for the visit. Each subsequent month the same will happen until the account is paid down. Also included in this account is the cost of medicine and diagnostic tests. As such, in this case, Fred will also have the cost of the medicine added to this account. We will call this account, Basic Medicine.

A week later, Fred is feeling no better, so arranges to return to the doctor. As before the same procedure is undertaken with the swipe and the recording, and the cost will be added to the Basic Medicine account. However, this time the doctor knows that he must use a consultant to further examine Fred. He ends the consultation, and Fred is sent to the surgery administration. The doctor has informed the administration of the surgery what kind of consultant is needed, and the administration makes a search on an online market for consultants. They enter Fred's postcode, and the search produces results for the nearest 20 consultants to Fred. Each consultant has two ratings, a doctor's rating and a patient rating, along with an hourly charge and earliest available appointment. The administrator asks Fred to select the consultant that he would like to use. The administrator makes a small flat fee charge for helping Fred use the system.

Fred decides that a consultant near to home is his priority, and selects a consultant with the best rating, at a roughly middle cost, that is near to him. He enters his PIN, and the contract with the consultant goes through, and the administrator helps Fred book an appointment At this point the administrator forwards the patient record to the selected consultant electronically. There is no centralised IT system for patient records, but all records must be available in a proscribed format (for technical people, an XML schema). As before, the costs of the visit are transferred to Fred's Basic Medicine account and Fred is asked to make a rating on the service of the doctor.

A few days later, Fred goes to see the consultant. Fred swipes his card at the start of the consultation, and enters his PIN. The consultant examines Fred and decides that Fred needs some minor surgery. At the end of the session, he writes up the results of the examination, tests and so forth, and forwards these electronically to Fred's doctor. In addition, he rates the decision of the Doctor to send Fred to see him. In this case, it was a necessary visit, so he rates the doctor highly. In addition, Fred is asked to enter his rating of the consultant in a private space for this purpose.

Once the doctor has seen the record from the consultant another appointment with Fred is made. At this stage, the doctor needs to help Fred to arrange the hospital that will be used for the surgery, and the doctor must be involved in this decision. However, before the appointment, the details of the required surgery, and the patients notes will be sent to the nearest 5 hospitals (or providers of the necessary surgery) to Fred's postcode. Fred's name and location will not be provided at this stage, such that local hospitals are unaware that Fred lives near to them. Each will be requested to give a quotation on the surgery. Included in the quote will be the total cost, the earliest date available, the surgeon available and so forth.

The quotation will be based upon the cost of the procedure itself, the cost of a hospital bed per night. In addition a quote will be given for managing likely complications, and the cost of additional days residency in the hospital. These will be calculated into the costs and will be weighted in the calculation according to likelihood. i.e. if a particular complication is very rare, then the cost of treatment will only be added in as a tiny fraction of the total quoted cost. This is one of the few areas of complexity within the system, and would require monitoring of statistics for the outcome and complications for different kinds of treatments. The aim will be to offer a final quote that includes loading for extended stays, and additional treatments, calculated as a final single figure. However, the actual bill will provided to the government will be based upon the full cost of what actually was undertaken, in accordance with the quote.

In addition to the 5 nearest hospitals Fred's doctor will also have the option of requesting a quote from two other hospitals. If the doctor believes that good treatment for the condition can only be obtained out of the area, then this will allow him to find other options. In addition, the doctor will be allowed to exclude up to one hospital if the doctor believes that their standards are poor. When excluding a hospital, the doctor will be required to give a reason why, so that the provider is made aware of their poor reputation.

The doctor can then select from the three providers of the lowest cost quotations, provided that there is no more than 10% differential between the costs of the cheapest and most expensive. If the differential is greater, then the system will automatically broaden the geographic spread, widening it until such time as 3 quotes are available within the the 10% range (the doctor will not need to actively do this, as the doctor should only finally see the results when 3 quotations meet the criterion). At the end of the process, Fred should be presented with three choices based upon geographic search, and up to two choices of hospitals selected by his doctor.

At this point, Fred has a real choice. Each hospital will have an availability date, and he will also be able to see a rating for the hospital for the procedure made by doctors, a rating made by patients, and the final cost of the procedure. Fred then needs to make a choice of hospital for the procedure. Fred can then select the hospital that best reflects his needs. He will be made aware that 25% of the cost of the procedure, and 100% of the costs of the hospital bed, will be allocated to his government health account. This will be allocated to the Major Procedure account, that will allow for up to 3% of his income to be taken each month to repay the cost of treatment.

We will jump forward in time, and Fred has been treated and (happily) with a successful outcome. Fred will then be asked to rate the treatment and hospital, as will his doctor. The costs of the entire process will all be deposited in his government health account, and over the coming months he will find that he is paying 8% of his total income into repaying the healthcare costs.

So what is the advantages of the system. The first advantage is that the system encourages everyone to consider a combination of quality of care and cost of care. It allows the users a wide choice of care according to their own priorities and needs. Furthermore, whether employed or unemployed, there is 100% availability of healthcare, and few would argue that a burden of a few percent of income for healthcare would be unreasonable, even taken from unemployment benefits or a pension.

However, within this scenario, there are several elements that are still missing. The first of these is Accident and Emergency treatment. This is a situation in which a patient does not have a choice. In this case, the only solution is direct government funding, and fixed fees for the system. In this case up to 2% of income would be used to repay treatment and a fixed fee will be applied for any entry into the A&E system. This will require a third account, the A&E account, making the total that can be taken from a person's income 10%. Due to the nature of the system, the government will need to directly contract with hospitals to provide A&E services.

Who would provide for the hospitals, or how will they operate?

The hospitals can be provided by any means. They could operate as charitable trusts, or as private concerns, or any format that can be imagined. Because of the system of choice, and doctors and patient ratings, only hospitals that provide good quality care cost effectively will survive. For example, if a hospital is providing poor care, then the doctor will reject it from the list of hospitals provided to the patient. If the standards of care given by nurses are poor, or if the hospital is not clean, providing poor quality food, then patients will give it a poor rating, reducing demand for its services.

What check on costs will there be?

One government check on costs will be to have a system close to that of NICE (National Institute for Health and Clinical Excellence). They will have a role of determining what might be funded within the system.

What of children?

The accounts of children will be allocated to their parents and, where the parents are not together the costs will be evenly split between the two parents.

What of preventative medicine?

Each individual within the system will be allowed one free health check per year without cost. Certain preventative checks, determined by NICE, will be offered free of charge to encourage uptake.

What of Medicines?

One of the few benefits of the current system is that the massive purchasing power of the NHS allows for cheap purchase of medicine through central control. As such, central purchasing will be retained in this area - the only centralised control in the system.

Won't this hurt the poor?

One of the benefits of this system is that a maximum of 10% if income will be taken from any individual. Even if the individual is on benefits, this is a very small price to pay. Furthermore, because of the system being capped at a percentage of income, the more wealthy the person, the more likely they are to pay for the treatment they have benefited from. If a person is on low income, and they undergo a major procedure, it may be that they never pay down their account. On the other hand, a high earner will be more likely to pay down their account. In this way, everyone makes a contribution, but it is likely that high earners will, on balance, pay more on average.

What is the role of government?

Government is subsidising healthcare, and collecting the remaining fees.

Should government have any role?

If we were to take a purely libertarian stance, no. However, health care is perhaps the one area where even libertarians might be nervous of a completely free market. Few want to see people lacking treatment, and dying for lack of healthcare.

What of dentistry?

The same system applies, and an additional 2% of income can be used to pay for the costs. However, each dentist can not undertake the work they suggest, but will play a role similar to that of the doctor in selecting treatment. As such, each individual will have a dentist for prescribing treatment, and will use another dentist for enactment of treatment. The system will therefore be the same as the system for selecting hospitals.

What of the rating systems?

One of the keys to a successful market is information and choice. The purpose behind the rating system is information. This is one area that would be under central control, as all users of the system need to have an input into one unified system, so that all ratings can be aggregated. This is a relatively simple system to achieve, and can be cost effectively deployed over the Internet. One of the keys to the system is that each rating needs to be anonymous, and each individual can only rate one event on one occasion (to avoid vindictive ratings).

Who is providing all the IT?

Each medical provider will have complete freedom over the system they use, provided that they can offer the information necessary for the operation of the system securely and with the data in a common format.

How could it be implemented?

The only complication in implementation is ensuring that everyone is prepared to provide data in an appropriate format. For provision of hospitals, the simple solutions is to take the existing hospitals and make them independent charitable trusts. From that point forward the market will then adapt to meet the demands of both patients and doctors. There need be no further intervention.

What if people have to travel for treatment? Won't they complain?

This is a question of explaining the benefits of the system to people. At the outset, there will be problems, complaints, news reports about the 'terrible hardships' this caused x,y, and z person. This is all about explaining that no system can be perfect and asking for patience whilst the system beds in, and patience until the benefits can be felt. The system will certainly improve standards over time, such that having to travel to get decent care will diminish as a problem over time, though will never be eliminated.

You've missed out a lot. What about, say, midwife services?

There are many elements not dealt with in detail. I am only establishing guiding principles here. Apply the principles laid out, and I think you will answer this question yourself.

Conclusion

As for my proposal for education reform I do not suggest that this is a finalised system. It is an idea, a framework, and nothing more. The purpose of the system, just like education, is to create a system that is both cost effective and provides good quality. In an ideal world, there would be no government role, but this offers a compromise between a state funded and private system.

In this system, everyone has their interests aligned towards quality and cost. A doctor can only propose a cost effective hospital, and a patient will need to decide what their priority is - locations, cost, availability over time, and quality of care. In such a system, over time, the healthcare system will shape itself to the needs of patients, but will shape itself in a way that offers cost effective care without sacrificing quality. Most importantly, paying for the care will not cause individuals hardship, as the maximum payment is !0% of income per month, or 12% if dentistry is included.

My reason, as for education reform, for such a system is to alter the structure of the UK, with an aim of making it more effective in the allocation of state expenditure. In this system, the state would still be required to offer subsidy, but that money would be used more efficiently and effectively, and with a vastly reduced bureaucratic cost. Furthermore the quality outcome would be improved for this reduced cost.

As before, comments on the system will be welcome. I hope that, at least, such a system motivates you to question the current centralised system.