The Law of Unintended Consequences

I think that one of the unwritten laws that govern economic activity is this: Whatever you pay for, you get more of.

By this I mean that once you establish a market for anything, suppliers will come forward to meet the demand for that product or service. If all of the supply is bought up, those suppliers will go out and produce more, operating on the assumption that if someone paid for it before, someone will pay for it again.

Jay Leno once did an ad campaign for Frito-Lay that expressed this concept better than I can. The tagline for the ads was “Crunch all you want. We’ll make more.”

Ordinarily, I have no objections to free markets and how they operate. Indeed, I’ve spent most of my adult life working under this principle. Finding ways to reduce the cost of what someone wants to pay for. Trying to anticipate when the next order is coming. Planning to increase capacity to supply more. Of course, I’ve always worked in legal industries. What makes free markets work is the buyers freely giving up their money to acquire what the sellers are selling.

But what about markets where the buyer has to buy, as long as the sellers are out there? Remember: Whatever you pay for, you get more of. If you keep paying, over time you’ll get more suppliers.

Welfare markets work like that. Aid to unwed mothers originally started out as a way of ameliorating poverty and protecting children. But what the government is paying for is women who aren’t married to have children. Not surprisingly, the number of women with children born out of wedlock has exploded in the past few decades.

Another area where the payer has no choice but to pay is in health care. Third parties pay for most of the health care in this country. The consumers of health care, the patients, don’t write the checks. The government, through Medicare and Medicaid, and private insurance companies, are how most Americans finance their health care. Health insurance is a pretty heavily regulated industry. And one of the regulations says that insurers have to pay for procedures, tests, and drugs that are “medically necessary.”

Not the cheapest way possible. Not the most cost effective. Whatever the doctor deems medically necessary, that’s what the insurer has to pay for.

So let’s suppose you are a supplier to the health care industry, like a medical device manufacturer, or a pharmaceutical manufacturer. Do you bend your efforts to reducing costs, or do you work to develop new treatments, and then work towards getting doctors to recommend those new methods? The latter does lead to progress in medical technology, but it also drives costs ever upward. Upward to the point that increasing numbers of people cannot afford insurance coverage.

“Crunch all you want. We’ll make more.”