Audio Blog: Three Way Economic Systems
And the answer really is folks: they don't work.
When you think about almost any economic system that exists today, there is a buyer and a seller. The seller has something the buyer wants and the buyer expects the seller to give him or her a fair price. There is an inherent negotiation that happens whether the negotiation includes price or not is irrelevant. A negotiation about economic value, their physical or service value for economic value.
When two parties are involved and there are two things being exchanged, economics is incredibly efficient. The economics of individual transactions are aggregated over a large number of transactions are incredibly efficient. The market in itself is not micro efficient, but it is incredibly efficient in the macro sense. Unfortunately, economists have known for hundreds or years, at least as long as there have been economists anyway, that three way economic systems don't work.
When there is a buyer and a seller and some other provider, somebody who provides cash to one or insurance to another, it inherently distorts the market. The two examples that are most easily known, not just in the United States but across the world, are systems like healthcare where there is an insurance provider or perhaps the government or schools where there is a provider and a purchaser that is the family or the student, the citizen. And then there is the government that is involved in regulating in some fashion, [we're] not anti-government regulation inherently, but any economic system, any economist will tell you, any economic system with three parties is inherently unstable. It cannot reach equilibrium.
All three parties are incented for different reasons and the incentives don't naturally balance in the negotiation that occurs over the price and the product and service. So be careful, anytime you are involved in internal or external exchange of good and services for some sort of compensation, be aware of any economic system that you are involved in that has three parties.
If you are in an economy, if you are in an industry that involves a third party, which would include insurance for the government, there is an inherent uncertainty and inefficiency there. It is not to say that the system doesn't work in some fashion, but it could be a greater efficiency if there were only two parties in the system.
Again, I don't mean to be anti government or anti insurance, [we] love the insurance that Mike and I have on our business and in our personal lives and yet insurance inherently distorts economic transactions.