Marc’s comment which I am perhaps belaboring helped me articulate in my own mind something that might be obvious to others but which had been somewhat inchoate in my own head. Regulation guides innovation. The free market cannot operate in a vacuum, devoid of laws.
The bit that helped me out was this:
In essence, the way the “market” for insurance works, the incentive is directed toward innovation on abdicating the duties under the policy, not innovating to create a more efficient system.
Regulation is going to shape where the innovative energy goes. Absent any regulation at all, you get innovation on how to kill people and take their stuff. So, you outlaw murder. Then, you get innovation on how to force people to work for you without compensation. Then, you outlaw slavery. Then, you get innovation on how to con people into giving you something for nothing. Then, you outlaw fraud. Etc.
“The market” doesn’t magically direct innovation to where it is going to do the most good. It directs innovation to where it is going to profit the innovator most. It falls to the legal system to make the harmful opportunities unprofitable.
As usual, Doug can develop the thought and put a more elegant construct around it than I can. Still flattered you thought my comment relevant enough to post it on the main page.
As far as this idea, the closest economic concept is that of externalities. The idea is that consequences of the market impact things not part of the market system – i.e. external to it. The classic example is that of the environment – companies would pollute to lower costs and become more competitive without regard to the environmental impact.
To advance Doug’s construct to a complex, modern market, RCRA, CRCLA, and the EPA was formed, as well as countless other regulations to ban the pollution of land, drinking water, etc…
Even the most staunch capitalist would have a hard time making an argument to support total deregulation of environmental pollution.
Health care is a bit different, because instead of screwing others it screws customers, but I think the construct holds.