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The health-care crisis and the financial crisis have a problem in common, which is how the government can regulate those markets to make things better, not worse.

Regulatory theory forms an interesting intersection of business, law, political science, and philosophy. Á‚ Do you give people incentives to do the right thing or punishments for doing the wrong thing? And what is the right thing, anyway? In health care, is our priority access to basic care or access to high technology? Do we care more about cost or about quality?

The libertarian argument is that the market will take of allocating resources. If there is an opportunity, a product will arise to meet it; if there is inefficiency, competition will eliminate it. If everyone acts in his or her own best interest, eventually the interests of society will be served as well. ItÁ¢€â„¢s a lovely theory, and it sometimes works in practice. But not always. At an extreme, the libertarian argument would say that doctors do not need to be regulated because once everyone knows who the bad doctors are, they wonÁ¢€â„¢t go to them anymore. Unfortunately, a few people may die needlessly before that happens.

The financial services industry has attracted free-market libertarians for decades. Much of the academic foundation for the business came out of the University of Chicago, which is synonymous with radical free market theories. ItÁ¢€â„¢s not a life-of-death industry, either. Money is important; as painful as it is to lose money, though, itÁ¢€â„¢s not as bad as medical malpractice that leads to loss of life.

Financial deregulation contributed to the financial collapse, although it did not cause it. The repeal of the Glass-Steagall Act in 1999 allowed commercial banks and investment banks to compete with each other, but it did not eliminate the role of the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state insurance regulators. There was just enough deregulation to prove that it is entirely possible for one party to act in its own best interests while destroying the system around it; there was just enough bad regulation to prove that if everyone is in charge, no one is.

So what do we do next?

Pitting Ayn Rand against Karl Marx is pointless, as no one is going to accept an extreme change in health care of finance. But then what? If we eliminate barriers to competition, such as the state-by-state regulation of insurance, will that help? If we eliminate restrictions on pre-existing conditions, will that hurt healthy people? If the government provides more funding for medical education, will that make doctors happy because they will have fewer student loans and thus be able to accept lower rates? Or will it generate restrictions on research that make our health care system the best in the world for people who have both lots of money and unusual medical conditions?

In 1962, Milton Friedman, who was not only a radical libertarian thinker but also, and unlike Ayn Rand, a heck of a good writer, claimed that the American Medical Association was the largest and most powerful trade union in the United States. His point was that a private market is not the same as a free market. Sometimes, the lack of regulation allows people to form groups or engage in practices that limit competition and hurt consumers. WeÁ¢€â„¢ve seen this in sloppy disclosure by credit card companies and mortgage lenders that make it hard for people to make good decisions, and weÁ¢€â„¢ve seen this by the consolidation of private insurance companies that make it difficult for companies or individuals to have much choice when shopping for plans.

In the Depression, many Americans flirted with Communism. (At the time, Stalin was doing an outstanding job of hiding his horrendous abuses of his people, so people outside of Russia had no idea just how bad Communism could be.) The Roosevelt administration raised taxes on the rich and set up collectivist organizations such as the Works Progress Administration to try to turn the economy around. Some say Roosevelt succeeded, others claim that he turned a short but painful recession into a long and painful depression.

There will be changes out of this recession, too. ItÁ¢€â„¢s interesting to watch, although itÁ¢€â„¢s not fun to live through it. And, it is hoped that average Americans, not ideologues, will help guide the debate.

About the Author

Ann Logue

Ann Logue is a freelance writer and consulting analyst who is fascinated by business and technology. She has a particular interest in regulatory issues and corporate governance. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley 2007), and “Hedge Funds for Dummies” (Wiley 2006), and has written for Barron’s, Institutional Investor, and Newsweek Japan, among other publications. As an editor and ghostwriter, she worked on a book published by the International Monetary Fund and another by a Wall Street currency strategiest. She is a lecturer in finance at the University of Illinois at Chicago. Her current career follows 12 years of experience as an investment analyst. She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation. How's that for deathly dull?

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