RIJKSUNIVERSITEIT GRONINGEN
A History of German and Austrian Economic Thought on Health Issues
Proefschrift
ter verkrijging van het doctoraat in de Rechtsgeleerdheid aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op maandag 17 september 2007 om 13:15 uur
door
Ursula Margarete Backhaus geboren op 11 juni 1955 te Heilbronn-Sontheim, Duitsland
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Promotor : Prof. dr. A. Nentjes
Beoordelingscommissie : Prof. dr. O. Couwenberg Prof. dr. J. A. H. Maks Prof. dr. R. Zuidema
ISSN: 0171-970X ISBN: 978-3-89846-490-1
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Frankfurter Abhandlungen zu den gesamten Staatswissenschaften
Band 6
Herausgegeben von Jürgen Backhaus, Erfurt,
Stiftungsprofessur für Finanzwissenschaft und Finanzsoziologie
Haag + Herchen Verlag GmbH, Fuchshohl 19a D-60431 Frankfurt am Main
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Ursula Backhaus
A History of German and Austrian Economic Thought on Health Issues
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Samenvatting
De ideeën van Paracelsus over gezondheid vanuit een sociaal-economische visie zijn al 500 jaar oud, maar werden eerst recent teruggevonden en toegankelijk gemaakt door een nieuwe editie van zijn sociaal-economisch werk. Ook de andere hier weergegeven inzichten over gezondheid en gezondheidszorg vanuit een economisch, sociaal en politiek perspectief zijn weinig bekend. In dit boek gaat het over de meest belangrijke ideeën van sociale wetenschappers en economen over gezondheid en gezondheidszorg, beginnend met Paracelsus en eindigend met Schumpeter. Behandeld worden grondleggende ideeën en concepten van Wolff, Justi, Roscher, Menger, Schmoller, Bücher, Oppenheimer en Althoff. De conclusie luidt dat hun bijdragen wel deels zijn te herkennen in de moderne gezondheidseconomie, maar dat wij toch ook belangrijke invalshoeken, die zouden voortvlooeien uit hun werk, vandaag missen.
Daarom kan een geschiedenis van de theoretische ontwikkeling van de gezondheidseconomie ook geen Whig history zijn. Volgens deze richting is de huidige stand van de ontwikkeling het logische gevolg van werk dat vroeger al is gedaan. Om een aantal redenen hoeft dit niet per se zo te zijn. De nieuwe economie van de gezondheidszorg heeft andere wortels, met name de Engelse National Health Service. Verder staan de hier besproken bijdragen niet in het Engels, vandaag de lingua franca van de sociale wetenschappen, ter beschikking.
In de dissertatie zijn, naast één voorbeeld van wetenschapspolitiek (Althoff), uitsluitend auteurs uit het Duitse taalgebied die klassieke bijdragen hebben geleverd voor een bespreking opgenomen. De hier gekozen auteurs zien gezondheid als onderdeel van menselijk handelen en gezondheidszorg als onderdeel van cultuur. De nadruk ligt op culturele ontwikkeling en gezondheid, op het subsidiariteitsbeginsel en op een minimale rol van de overheid in de gezondheidszorg. De weergave van de inzichten van de behandelnde auteurs geeft ook een antwoord op de vraag in hoeverre zij een bijdrage leveren over aspecten zoals vraag naar en aanbod van de gezondheidszorg, informatie, optimale contracten, de markt voor geneesmiddelen, verzekeringen, technologie, instituties zoals ziekenhuizen en bejaardenhuizen, waardering van levens en levenskansen, sociale verzekeringen, en beleid en vraagstukken in de toekomst. Aangegeven wordt dat hun voorstellen politieke relevant waren in hun eigen tijd.
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Propositions
1. Economic thinking on health and health issues was present well before Kenneth Arrow’s seminal study of 1963.
2. Following Paracelsus, the cost-effective cure for a disease can generally be found in its immediate vicinity. (Chapter 2)
3. The health of the population is part and parcel of the wealth of the state. (Chapter 4)
4. The Austrian contributions with respect to perceptions of health in the economy can hardly be distinguished from those of (what they call) the members of the Historical School. In this respect, there is no dispute. (Chapter 7)
5. As Karl Bücher has shown, the role of music, rhymes, arts, crafts, and gifts is important in the production process of an economy not only at a lower cultural level. (Bücher: “Das Geschenk in der modernen Ökonomie), (Chapter 9)
6. The extreme shortage of transplantable organs could be overcome through gift relationships as suggested by Bücher. (Chapter 9)
7. With improved means of communication, Oppenheimer’s proposal for combining rural forms of healthy living and work has become even more plausible than in his own time. (Chapter 11)
8. Schumpeter omitted the Seventh Chapter of his Theory of Economic Development and with it his contributions to health and health issues. (Chapter 12)
9. Health is a prerequisite for enjoying wealth.
10. Today, health systems compete as evidenced by the phenomenon of health tourism.
11. It is better to light a candle than to curse the darkness. (Lao Tse, China, 5de eeuw v. Chr.)
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Table of Contents
1. Introduction
2. Paracelsus, Theophrast von Hohenheim (1493-1541): a Holistic Approach to Health Including the Social Scientific Point of View
3. Christian Freiherr von Wolff (1679-1754): The House as the Relevant Context of Health Provision
4. Johann Heinrich Gottlob von Justi (1717 - 1771): Health as Part of a State's Capital Endowment
5. Wilhelm Roscher’s (1817-1894) Historic Method and Health Issues
6. Adolph Wagner (1835-1917): The Increasing Role of the State in Health Care
7. Carl Menger (1840-1921): Perceptions of Health in the Economy
8. Gustav von Schmoller (1838-1917): Health Issues as Part of the larger Social Question
9. Karl Bücher (1847-1930): The Role of Nonmarket Exchange in Health and Health Care
10. Friedrich Althoff’s (1839-1908) Entrepreneurial Approach to Health Related Sciences and Scholarship
11. Franz Oppenheimer’s (1864-1943) Social Economic Approach to Health
12. Joseph Schumpeter's (1883-1950) Broader Picture and Health Issues
13. Common Themes
14. The Old and the New Health Economics
15. Summary and Conclusions
Appendix: Abstracts, Keywords, JEL Codes
List of Illustrations
Biography
Acknowledgements 9
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Chapter 1
Introduction
This history of economic thought on health issues is a history of health economics before Arrow. The discipline of health economics conceived as a particular branch of economic science is defined as the “application of economic theory to phenomena and problems associated with health.” 1 Typically, Kenneth Arrow’s seminal study of 1963 marks the start of the discipline of health economics.2 Economists have, however, thought about health for centuries, even put the issue at center stage of their expositions (Justi). Since Paracelsus, the first social scientist systematically discussing the economics of health related institutions and services, lived 500 years ago, the focus of this book is not only broader, but primarily different from writing a history of health economics.
The leading question of the study is: what are the early economic ideas on health in the German and Austrian thought? A history of the theoretical development of health economics cannot be a whig history written as if the current state of health economics were a necessary and logical outcome of work that had been done as far back as centuries ago. 3 To the contrary, the added value of a history of thought on the economics of health issues is to emphasize different points of view and departure, different approaches, different methods, and different results from what is currently available in the professional literature in health economics.
In his presidential address before the meeting of the History of Economic Society in Riverside (1978), George Stigler said about the history of economic thought that it is either forgotten, because it has been integrated into the mainstream and need no longer be remembered, or it is not history of thought, because it is a classic, but looking at these rightfully forgotten authors is just something for economists, who have not mastered their trade. 4 In this book, I am looking at classical authors, which
1 Anthony J. Culyer. 2005. The Dictionary of Health Economics . Edward Elgar. Cheltenham, UK, p. 150. 2 Kenneth Arrow. 1963. "Uncertainty and the Welfare Economics of Medical Care." American Economic Review . December 1963, 53 (5), pp. 941-73. For the viewpoint that Arrow’s seminal paper has been the main impetus for health economics as a modern scientific discipline compare e. g. the contributions in the special issue edited by Mark A. Peterson, 2001. Kenneth Arrow and the Changing Economics of Health Care . Journal of Health Politics, Policy and Law . Vol. 26, No. 5, October 2001. 3 Nevertheless, this is the economic approach by Mark Blaug. 1985. (4) Economic Theory in Retrospect. Cambridge: Cambridge University Press. 4 George Stigler. 1969. ”Does Economics Have a Useful Past?” History of Political Economy . 1(2), pp. 217-230. There are some interpretations not realizing the irony in the argument that Stigler in his lecture meant to be 11
have been selected to make the point about the neglect of the history of economic thought in modern economics of health. No attempt has been made to cover all subjects of economic thought on health issues.
I am in particular looking at those classical works that are not easily available, since they are locked into the German language. "English is the lingua franca of the academic world these days, and knowledge that is not transmitted in it becomes lost, certainly in economics and most other social sciences." 5 Primary sources are used and relevant health issues and quotes are selected and analyzed in context in order to make these classical works accessible to English based scholars. 6
The topic I have chosen for my expedition into the history of thought is health from an economic point of view. The reader might ask why a history of ideas on the economics of health is relevant today. The issues raised in the earlier literature are hardly mentioned in health economics today, although they have not lost their relevance. For instance, Paracelsus and half a century later Oppenheimer looked at the relationship between environment and health, Justi focused on development and health, Althoff saw a connection between university reform and health, Schmoller pointed towards the interaction between the development of markets and health, or Bücher focused on the quality aspect through non-market provision. As will be pointed out in the final chapter, these issues do not figure prominently in modern health economic texts.
The shortcomings of current health care systems are well-publicized, and so are the prescriptions for reform. Short term prescriptions follow each other in rapid succession. It is unclear, where we go to, but could we take a step backwards in order to find the basic principles that underlie our health care systems? As the timetable given below shows, the authors selected in this study responded to the needs of their time. The advice they gave was politically relevant in their time. 7
provocative. He was blasting against economists of historian thought, who concentrate on irrelevant authors for their own sake. Instead, he wanted to focus on issues as does this book 5 Wolfgang Drechsler. "Christian Wolff, Law and Economics, and the Heilbronn Symposia in Economics and the Social Sciences: An Introduction." Jürgen Backhaus. Editor. 1998. Christian Wolff and Law and Economics. The Heilbronn Symposium. Hildesheim: Georg Olms Verlag, pp. V-X, p. VI. 6 This is also the mission of the Heilbronn Symposia on Economics and the Social Sciences . "The Heilbronn Symposia were conceived to offer a forum for the reconsideration of a tradition of German economic and social thought that had become almost entirely lost." Wolfgang Drechsler, 1998, op. cit. , p. V. 7 The political relevance of the economic proposals by Schmoller and Menger has been shown by Erik Grimmer-Solem. 2003. The Rise of Historical Economics and Social Reform in Germany 1864-1894. Oxford: Clarendon Press. A gap, however, remains as to the political impact of the authors. This area has not been researched very well. 12
The relation between economic analysis of health and health policy cannot be clarified within the scope of this study. The focus here is on the economic analysis of health; it is assumed that research influences health policy. Health policy can also influence health economics. For instance, health economics as it is taught now largely reflects the different national institutions such as the British or Canadian Health Service, the differing institutions in the United States, Germany or France. This is why these textbooks differ. This nationally defined teaching agenda can very well exclude relevant policy options which are then in turn not presented to policy makers. Because of the strong interrelationship between theory and policy, both are discussed in the same chapter on the different authors.
The chapters of this study are roughly in chronological sequence, but there are some chronological overlaps. The timetable below shows how the authors selected relate to each other in time. The starting point of this study is set about five hundred years ago, when Theophrast Bombast von Hohenheim, called Paracelsus, (1493-1541) laid the groundwork for pharmaceutical medicine. Only recently, his social science readings have been discovered. By following a holistic approach to health care, he also included the social scientific point of view into his studies, which is the focus of the first chapter.
Timetable:
Authors Selected for a History of Thought on the Economics of Health Issues
Around 1520 the Plague raged through Paracelsus (1493-1541) tried to find Europe. solutions.
After the Thirty Years’ War (1618-1648) The desperately bad health states of Cameralism emerged. Cameralism the populations after the Thirty Years’ became a university science in 1727 at War led the Cameralists to propose the Prussian Universities of Halle and early health policy measures. Wolff Frankfurt on the Oder. (1679-1754) suggested a bottom-up approach to health care. In accordance to Wolff’s principles, Justi (1717-1771) devised encompassing health policy measures.
Early industrialization moved more and Roscher (1817-1894) identified the more people into the labor force for health related problems and looked for longer hours than farm labor required. guidelines to protect the working Women and children were also population. recruited.
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Medium industrialization and Wagner (1835-1917) defined an entire agglomeration coupled with the catalogue of new tasks of the state depopulation of the land produce emphasizing cultural and technological desparate sanitary and health progress. conditions. Cultural and industrial development led Menger (1840-1921) explored issues of to a new post-feudal upper class with perception and education as new attitudes and diseases. determinants of better health.
Rapid industrialization produced deep Schmoller (1838-1917) designed and crises with massive insecurity, often suggested market-based social involving poverty and infirmity of large institutions to address three basic risks segments of a mostly urban population. of life: health insurance, cooperative In this period the threat of a class-war accident insurance was imminent. It is referred to as the (Berufsgenossenschaft), and provisions First Founders’ Crisis . in the case of the loss of the breadwinner. Loss of the work place is not yet compensated for.
The social welfare state is still in an Bücher (1847-1930) emphasized non- early stage of development and market, but exchange-based insufficiencies are gaping wide open. relationships to supplement state provision and market exchange.
As Schmoller had diagnosed, urban Althoff (1839-1908) designed and agglomeration produced significant implemented structures for the debasement of health. development of scholarship and science to address the conditions determining health. For instance, the three Nobel prizes by Behring, Koch, and Ehrlich were attributed to his enabling efforts.
The Second Founders’ Crisis raging in Oppenheimer (1864-1943) defined the late 19 th and early 20 th century led economics as social medicine. He to the economic downfall of large emphasized cooperative forms of living segments of the population, both urban and working in order to alleviate and rural. conditions leading to poverty and poor health.
Schumpeter (1883-1950) emphasized in his early writings the social consequences of boom and bust in their many social repercussions, including health.
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Paracelsus traveled widely, acquiring medical knowledge from various sources. He learned in Italy and Spain, and became familiar with Spain’s rich experience from the colonies. His medical, philosophical and theological contributions are well-known, but his social-economic contributions have not received much attention. Paracelsus posed critical questions concerning the organization of health care and monopoly structures herein. He pondered about the just price of health care and proposed an early concept of income prices. He investigated into the connection between medical conditions and working conditions when he studied the medicinal uses of minerals in the mines of the Fuggers. He established the connection between causes of (professional) diseases, the circumstances of the work, and conceivable treatment, both in terms of prevention and in terms of care.
Paracelsus was part of the early tradition of public health on the Continent, which emerged in the late middle ages, when cities, duchies, and territories governed by the church, appointed city and county physicians in order to control infectious diseases. As a military surgeon, Paracelsus was not only in charge of the cure of the wounded, but also of sanitary conditions and control of infectious diseases. He studied camps for the treatment of the plague, which raged during Europe at his time. When Paracelsus became the city physician of Basel, he was in charge of disease control. This position was combined with a professorship at the university. He showed that a concentrated effort at curing or caring for particular illnesses opens opportunities for improved efficiency, but also the opposite such as infections in hospitals or military camps. He emphasized this aspect, and can thus be seen as part of the early public health tradition, a tradition, which later was advanced by the Cameralists.
As Kenessey has shown, the role of statistics was crucial in introducing the economic perspective into health care. 8 Early roots of health statistics can indeed be traced back to the time of Paracelsus, but this was before statistical methods had been developed leading to the concept of health insurance. Already in medieval times hospitals were set up as municipal foundations, which maintained record- keeping. Hospital data bases later allowed the application of methods of accounting and the introduction of principles of organization into hospitals. In upper Italy and upper Germany large foundations with social purposes continued sometimes for centuries and left records, which can be mined so as to construe long time series on mortality, morbidity and health states. Schmoller referred to guild records as yet another data base on health. The guilds provided early institutions of health insurance to their members on the basis of extensive data bases that included the death and health statistics of their members. 9 Military concerns and the concern to
8 Compare Zoltan Kenessey. 1995. "The Emergence of Quantitative Thinking about Mortality and Life Expectancy." International Review of Comparative Public Policy. Vol. 6, pp. 291-311. 9 Gustav von Schmoller. 1870. Zur Geschichte des deutschen Kleingewerbes im 19. Jahrhundert . (Towards a History of Small German Crafts and Industry in the 15
control infectious diseases were two main reasons for individual states to set up data bases and evaluate them by statistical methods. Economic concerns also played a role in the development of statistical methods. An example is the evaluation of a human life. The concept of probability, which turned out to be particularly important to the introduction of health insurance and social security, has certain roots in the sixteenth century, the age of Paracelsus, but clearly evolved a century later in connection with marine and life insurance underwriting (Kenessey, op. cit. , p. 292).
The public health tradition on the Continent was systematically advanced by the Cameralists. The existence of monopolies in health care has already been a problem to Paracelsus, who saw the possibility of fraud and low quality of health care provided. Veit Ludwig von Seckendorf (1626-1692), an early Cameralist, also demanded the abolishment of monopolies and gave guidelines for the improvement of the health of the population, which he recommended to write into the state’s constitution. 10 He described an early territorial public health policy in Gotha, where he was the advisor to Duke Ernest II. 11 Other interesting plans such as Krug’s proposal of an early health insurance can be found by digging into the archives. 12 Cameralism received a strong impetus during and after the Thirty-Years'-War in response to the economic devastation, poor health states of people and depopulation of the countries. The Cameralists feared that the provision of health care to the population would be insufficient and possibly of low quality. They proposed public health measures and established health boards, which gathered data on particular illnesses and deaths. Cameralists interpreted the health of the populace as capital of the states.
The third chapter is devoted to Christian Freiherr von Wolff (1679-1754), who appears in Schmoller's Blueprint in the context of and as a precursor of the Cameralist sciences. 13 Desperately bad health states of the population after the Thirty-Years'-War led Wolff to suggest a bottom-up approach to health care. For
19 th Century). Halle. 10 Compare Veit Ludwig von Seckendorf. 1665. „Gesundheit der Leute in der Landesordnung zu bedencken.“ 2, 8, 7 . Teutscher Fürsten Stat . (German State of Princes). New edition. Second volume. Glashütten/Taunus: Detlev Auvermann. 1976. Reprint of the third corrected edition of 1665. 11 Andreas Klinger. “Veit Ludwig von Seckendorff’s “Fürsten Stat“ and the Duchy of Saxe-Gotha.“ European Journal of Law and Economics . Issue 19.3 – special issue “Veit Ludwig von Seckendorff (1626-1692),“ pp. 249-266. 12 An example is the health insurance proposal by Krug, analyzed by Winfried Schmähl. 1997. “Avoiding Poverty in Old Age by an Obligatory Contribution- Financed Minimum Insurance. Leopold Krug’s “Poor Man’s Insurance” of 1810 in the Light of Present Day Discussions.” Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Jürgen Backhaus. Editor. Marburg: Metropolis, pp. 15-33. 13 Gustav von Schmoller. 1923. Grundriß der allgemeinen Volkswirtschaftslehre. Erster Teil. (Blueprint, Vol. I). München, Leipzig: Duncker & Humblot, Introduction, III.3., pp. 84-100. 16
every aspect of life, his focus is on the household and not on the individuals. This is important since many healths related services can best be provided within the immediate vicinity of the person to be treated. Even today, many such services are provided by the family directly. Conversely, many conditions depend directly on the lifestyle of the family. Wolff is the founder of economics within his general system of natural law ( jus gentium ). The subsidiarity principle, which gained new relevance today, is attributed to him.
The most prolific writer of the Cameralists was Johann Heinrich Gottlob von Justi (1717 - 1771), whose proposals with respect to health and health care are discussed in the fourth chapter. Since the happiness of the people is the focus of Johann Heinrich Gottlob von Justi's analysis, their health is his central concern and he considers every conceivable aspect in which the state through policy and administration can improve the health state of the populace. 14 For instance, he focused on agricultural policy in order to prevent starvation and starvation-related diseases. He tried to improve sanitary conditions and initiated public health laws. He suggested that war should not to be led in wintertime in order to minimize human losses. Justi proposed to set up a board that systematically studies the causes, including social and environmental reasons, of illnesses and epidemics. On the basis of these statistics, appropriate public health measures could be devised and implemented.
Wilhelm Roscher (1817-1894), (chapter five) stood still firmly in the tradition of Cameralism. He studied the consequences of the period of early industrialization, which moved more and more people including women and children into the labor force for longer hours than farm labor required. Roscher, who introduced the historic method to economics, saw the family unit as the beginning of a nation's economy, and not the individual. In line with the Cameralists he wanted to educate people in order to lead them out of poverty, and thus improving health. He proposed public regulation of factories and the institution of social welfare services and, in the Kingdom of Saxony, he was politically active in their implementation. While Roscher provided a documentation of early insurance programs, he did not systematically base the social economy on insurance principles as Schmoller did later (compare chapter eight). From today's point of view his contribution lies in building institutions for health care services and in his reflections on what could be called, parallel to constitutional public finance, constitutional health economics.
Adolph Wagner (1835-1917), (chapter six) was politically engaged in the same sense as Roscher and Schmoller. Wagner witnessed a time of medium industrialization and agglomeration, which was coupled with the depopulation of the land. He defined an entire catalogue of new tasks of the state emphasizing cultural and technological progress. He predicted that the state will become more influential
14 Ursula Backhaus. Forthcoming. "Johann Heinrich Gottlob von Justi (1717 - 1771): Health as Part of a State's Capital Endowment." In: The European Heritage in Economics and the Social Sciences , Volume VI. Jürgen Backhaus and Frank Stephen, eds. New York: Springer. 17
over time with an increase in cultural and technical development and the general sophistication and interconnectedness of a complex society. This prediction is referred to as Wagner's Law . Wagner also provided an early formulation of the public goods theory by formulating the conditions under which the state can and should play a role in the provision and finance of goods and services. He thus created a basis for legislation. The current explosion of health care expenditures is partly due to factors identified by Wagner, but partly also to deficiencies in health care organization. Policy relevance requires a distinction between these two sets of causes.
The cultural and industrial development had led to a new post-feudal upper-class with new attitudes and new diseases. Carl Menger (1840-1921), (compare chapter seven) emphasized issues of perception and education as determinants of better health. While Schmoller and Menger had basic methodological differences, they shared the same basic values with respect to their perspective on health. Menger tried to explain why some people make more and larger investments in health than others, a thought which is central to explaining the effects of individual life styles on health. 15 This awareness has only recently led to an orientation towards social medicine in the curricula of medical sciences.
Gustav von Schmoller (1838-1917), (chapter eight) was engaged in both, research and organizational activities in order to pursue his research program. He was the founder of the Verein für Socialpolitik , whose research and debates entered the political discussion surrounding the introduction of a social security system in Germany. 16 The social legislation Schmoller proposed tried to root out the social causes and in particular economic causes of poor health. In a time of rapid industrialization, which led to deep crises with massive insecurity ( First Founders’ Crisis ), often involving poverty and infirmity of large segments of a mostly urban population, the threat of a class-war was imminent. As a solution, Schmoller investigated insurance solutions for preventing hardships for families. He designed and suggested market-based social institutions to address three basic risks of life: health insurance, cooperative accident insurance (Berufsgenossenschaft), and provisions in the case of the loss of the breadwinner, but in his proposal he excluded compensation for loss of the work place.
Prince Bismarck (1815-98) introduced compulsory health insurance in Germany in 1883, compulsory accident insurance in 1884, and compulsory old age insurance followed in 1889. 17 Although William II facing the industrial crisis shortly after having
15 Ursula Backhaus. 2005. "Austrian Aspects to Health Economics." Modern Applications of Austrian Thought. London: Routledge, pp. 175-194. 16 The activities of the Verein für Socialpolitik surrounding this legislation have been interpreted as an important root of the introduction of the economic perspective to health issues. Reiner Leidl. 1993. Gesundheitsökonomie als wissenschaftliches Fachgebiet. (Health Economics as a Scientific Field). Inaugural Lecture , University of Limburg, 10-21-1993, pp. 4-9. 17 Bismarck’s social welfare legislation is at the basis of a health care system in 18
ascended to the throne, very much wanted to establish a system of unemployment insurance, Bismarck intervened and prevented the measures, which the young Emperor had already proclaimed in his famous Easter Messages. This led to Bismarck’s dismissal. The economic reasoning underlying the Chancellor’s confrontation with the young Emperor was sound, however. Under the conditions then prevailing, a bust always affected all industries alike, so the only conceivable buffer was the then very small public sector. An unemployment insurance system could therefore not be based on actuarial principles, as the rest of the “new social institutions” (Schmoller) had been. The risks were not unevenly distributed and therefore could not be pooled, the basic idea behind any insurance system. 18
Schmoller laid the basis for an insurance system based on actuarial and, by implication, market principles, but guaranteed by the state. 19 In building on the medieval institutions such as monasteries, charitable city foundations, guilds, etc., the new social institutions were designed in terms of constitutional design. This means that they would be independent agents not requiring constant political attention. On the other hand, the same principle implied that they would not be available for "economic manipulation for political profit." 20 Modern discussions about such issues as care for the elderly, catastrophic illnesses and epidemics, although in principle open to an insurance based approach, are often dealt with by specific tailored programs. The insurance based approach has the advantage of creating incentives to reduce risks and losses. This is not true for most program based projects.
Based on Schmoller's work, his successor at the University of Berlin, Heinrich Herkner (1863 – 1932) devised the social legislation in Germany. Both authors are important to what is specific about the German development, for instance as
Europe, which is best described as health care "from cradle to grave." The United States has adopted only some of Bismarck's proposals. The United States owes the standard retirement age of 65 to Bismarck. Many of his reforms have never been established in the United States. This accounts for the main differences between the European and the American health care systems 18 Only the terms of the Treaty of Versailles led to a different situation. Now the Reich had every incentive to run deficits, and it used all available surplusses to let them disappear in disguised social programs. Examples include the introduction of the eight-hours workday, generous regulations in a contract regulating compensation in the form of wages and non-wage components for civil servants ( Reichsangestelltentarifvertrag ), and the regulation of taxes and levies ( Reichsabgabenordnung, RAO ), which contains many social components. Herkner took a leading role in achieving these contracts. 19 Ursula Backhaus. 1997. "Historical Approaches to Health Economics." Essays on Social Security and Taxation . Gustav von Schmoller and Adolph Wagner Reconsidered. Jürgen Backhaus, Editor. Marburg: Metropolis, pp. 445-471. 20 Richard E. Wagner. 1977. "Economic Manipulation for Political Profit: Macroeconomic Consequences and Constitutional Implications." Kyklos, Vol. 30, pp. 395-410. 19
compared to England which had the Poor Laws . Specific about Germany is that the social legislation tried to root out social causes and in particular economic causes of poor health and this can be attributed to Schmoller and Herkner.
The beginnings of the social welfare state were laid, but great insufficiencies remained. In this situation Karl Bücher (1847-1930) (compare chapter nine) investigated the role of exchange in nonmarket situations. He formulated the conditions under which charity can lead to an efficient provision of health care. 21 An example where his conditions have been instituted is the organization of blood donation in Germany, the Netherlands, Great Britain and the United States. The current political debate on health care focuses on the question whether health care should be provided by the state or by the market or a combination thereof. Bücher, by pointing towards the nonmarket elements in health care, showed that under certain conditions nonmarket exchange can supplement state provision and market exchange.
Building on Roscher, Schmoller, and Wagner, Friedrich Althoff (1839-1908), the legendary Prussian administrator in the Ministry of Culture and Science, took a holistic approach to health policy (compare chapter ten). Friedrich Althoff (1839- 1908) was a Prussian administrator in the Ministry of Culture and Science, who through his skillfully designed science policy created an institutional environment in which science and scholarship could thrive. His attempt to modernize the Prussian university system through the foundation of Technical Universities and the insistence of granting them equal academic privileges at a par with traditional Universities was supported by Emperor William II. This partly enabled the Universities to conduct technological research and brought about many innovations, including some in the field of medicine. This innovative push was brought about through a change in the incentive structures. 22 The industrial development had significant effects in relation to disease, for instance new diseases emerged among the proletarian class of the cities, and this required new ways to view and treat these diseases. Building on Schmoller, Althoff took a holistic approach to health policy. He viewed health policy as an independent policy that systematically builds on other sciences. Science development led to new insights for more livable cities, improved architecture, and better infrastructure. Althoff founded institutes and hospitals to further experimental and diagnostic research in health care. He gave excellent researchers a chance, even if they were outsiders in the traditional system. Under Althoff, Germany introduced public health legislation, as in the case of combating tuberculosis. Althoff
21 Ursula Backhaus. 2000. "Non-Market Exchange in Healthcare: Lessons from Karl Bücher." Karl Bücher: Theory - History - Anthropology - Non Market Economics . Backhaus, Jürgen. Editor. Marburg: Metropolis, pp. 337-362. 22 This has been documented in a dissertation by Lode Vereeck. 1993. The Economics of Science and Scholarship. An Analysis of the Althoff System. Maastricht: Universitaire Press Maastricht. German translation by Ursula Backhaus. L.M.C. Vereeck. 2001. Das deutsche Wissenschaftswunder. Eine ökonomische Analyse des Systems Althoff (1882-1907). Volkswirtschaftliche Schriften , Vol. 514. Berlin: Duncker & Humblot. 20
is particularly relevant in the light of the current discussion on technology. Is it to be preferred to cut back on development and implementation of new technology in health care in order to keep a check on raising costs, or is it rather to be preferred to set optimal incentives for innovation?
The Second Founders´ Crisis raging in the late 19th and early 20th century shaped Franz Oppenheimer´s (1864-1943) social economic approach to health (compare chapter eleven). Oppenheimer worked as a physician in rapidly industrializing Berlin. He realized that many diseases were caused by the social environment. Hence, he felt that it was the economy that had to be cured. Confronted with massive unemployment in the industrial quarters of Berlin, he designed a scheme to buy out defaulted large rural estates and turn them into small agro-industrial farms. The small business farmers took their unemployment insurance claims as down payments for these small business agricultural enterprises. Traces of these colonies survived the Communist regime and can be still found in Berlin and Brandenburg, even Mecklenburg. Oppenheimer tried to found the appropriate institutions in order to remove the causes of illness. He developed a new order of society, so that people would be able to lead a healthy life, both from a medical and a social point of view. He sees the two as the two necessarily linked sides of the same coin. Oppenheimer was the author of several major works. Die Siedlungsgenossenschaft (The Cooperative Settlement for Development), 1896, 1922(3), forms the starting point of his work and can serve as the basis for an analysis of health economic implications of his plan. 23
Oppenheimer also developed a new approach to sociology, but this part of his work cannot be considered here. Apparently, at the time, when sociology was at its infancy, medical analogies of different kinds played an important role. While Oppenheimer saw himself as the physician of an economy, Goldscheid insisted that neither capital, nor labor, nor natural resources, but the human being in its entirety should be the focus of economic and sociological analysis. 24 Schumpeter’s early German work fell into roughly the same time frame as that of Oppenheimer and Goldscheid, at the crossroads of sociology and economics.
The connection between the empirical (historical) approach of Schmoller and the more general issues, including health had been worked out by Joseph Schumpeter (1883-1950) (compare chapter twelve). The analysis is based on a work by Schumpeter, which has been untranslated and hard to get by. This part of Schumpeter's work appears only in the first edition of his Theory of Economic Development in the German language and has been omitted from future editions and from the English translation. 25 In the “Seventh Chapter,” Schumpeter sketched the
23 Franz Oppenheimer. 1896, 1922(3) Die Siedlungsgenossenschaft. (The Cooperative Settlement for Development). Jena: Fischer. 24 Rudolf Goldscheid. 1908. Entwicklungswerttheorie, Entwicklungsökonomie, Menschenökonomie . (Value Theory of Development, Economics of Development, Economics of the Human Being). Leipzig: Werner Klinkhardt. 25 “Seventh Chapter.“ Leipzig, Verlag von Duncker & Humblot. 1912. 21
broader picture of economic development. Looking at this broader picture, we find many details with important implications for health policy. Schumpeter tried to integrate the discipline of economics into a larger social-economic context. He widened his scope to encompass innovation in other social realms, in political, artistic, or scientific processes.
In chapter thirteen, the historical authors’ perspective is summarized with respect to three major themes: cultural development and health, the principle of subsidiarity, and the role of the state in public finance. These contributions concern both, economic theory and policy of the time when they have been written. With respect to the principle of subsidiarity, Paracelsus, Wolff, Roscher, and Schmoller highlight issues of care provided within and outside the family. Nonmarket exchange as discussed by Bücher also has its roots in the principle of subsidiarity. The second major theme refers to economic and social conditions with respect to cultural development and health as discussed by Justi, Roscher, Schmoller, Oppenheimer, and Schumpeter. Different aspects are pronounced. For instance, Menger focused on health and errors in a culturally developing society and the role of time preference; Schmoller introduced the idea of insurance as a basic principle of a market economy in response to the needs of increasing industrialization and urbanization. Diversity is also present with respect to the third major theme, the role of the public sector: public preventive health care measures were addressed by Justi and Wagner; health care legislation was discussed by Justi, Roscher, and Schmoller; government as a source of finance, as well as the limits of government, were stressed by Wagner; an innovative role of government was realized by Althoff, who created efficient incentives in the organization of medical research; and the introduction of mandatory catastrophic health insurance for basic needs was proposed by Schmoller. The chapter ends with final remarks.
The difference in perspective between the old and the new health economics is described in chapter fourteen. The field of health economics has proliferated over the last few years. The handbook by Culyer and Newhouse provides an overview over the field,26 as well as recent textbooks, the most important being those by Breyer and Zweifel,27 the reader by Fuchs, 28 Folland, Goodman, and Stano, 29 Getzen, 30 Mooney. 31 Websites by professional associations and the major professional journals
26 Anthony J. Culyer and Joseph P. Newhouse. Editors. 2000. Handbook in Health Economics. Amsterdam: North-Holland. 27 Friedrich Breyer, Peter Zweifel. 1992. Gesundheitsoekonomie. (Health Economics). Berlin: Springer. 28 Victor R. Fuchs. 1986. The Health Economy. Cambridge, Massachusetts: Harvard University Press. 29 Sherman Folland, Allen C. Goodman and Miron Stano. 2001 (3). The Economics of Health and Health Care. Upper Saddle River: Prentice Hall. 30 Thomas E. Getzen. 1997. Health Economics: Fundamentals and Flow of Funds. New York: John Wiley & Sons, Inc. 31 Gavin Mooney. 1986. Economics, Medicine and Health Care . Brighton: Wheatsheaf. 22
provide further insights.32 As Getzen has noted, “the study of health economics is relatively new and still in the process of refinement.” (Getzen, op. cit. , p. iv). The description of the historic perspective in chapter fourteen is based on basic health economic terms, which are derived from the chapters of the book. Most of these terms can also be found in any current textbook of the field. This approach solves a methodological problem; historical contributions should not be compared to modern terms, which were not present at the time.
In this book, care has been taken to identify early ideas on economic issues of health, to unlock this knowledge from a foreign language or a hidden source, and to show how health economic issues can be approached from the point of view of historical authors. The study ends with a summary and propositions which transmit the central message of each chapter.
References
Arrow, Kenneth. 1963. "Uncertainty and the Welfare Economics of Medical Care." American Economic Review. December 1963, 53 (5), pp. 941-73.
Backhaus, Ursula. 1997. "Historical Approaches to Health Economics." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Jürgen Backhaus, Editor. Marburg: Metropolis, pp. 445-471.
Backhaus, Ursula. 2000. "Non-Market Exchange in Healthcare: Lessons from Karl Bücher." Karl Bücher: Theory - History - Anthropology - Non Market Economics. Backhaus, Jürgen. Editor. Marburg: Metropolis, pp. 337-362.
Backhaus, Ursula. Forthcoming. "Johann Heinrich Gottlob von Justi (1717 - 1771): Health as Part of a State's Capital Endowment." In: The European Heritage in Economics and the Social Sciences , Volume VI. Backhaus Jürgen and Frank Stephen. Editors. New York: Springer.
Backhaus. Ursula. 2005. "Austrian Aspects to Health Economics." Modern Applications of Austrian Thought. London: Routledge, pp. 175-194.
Blaug, Mark. 1985. (4) Economic Theory in Retrospect. Cambridge: Cambridge University Press.
Breyer, Friedrich and Zweifel, Peter. 1992. Gesundheitsoekonomie. (Health Economics). Berlin: Springer.
32 See, e.g. Cambridge Quarterly of Health Care Ethics, Health Affairs, Health Economics, Journal of Health Economics, Health Services Research, Milbank Memorial Fund Quarterly, or the New England Journal of Medicine. 23
Culyer, Anthony J. and Newhouse, Joseph P. Editors. 2000. Handbook in Health Economics. Amsterdam: North-Holland.
Drechsler, Wolfgang. "Christian Wolff, Law and Economics, and the Heilbronn Symposia in Economics and the Social Sciences: An Introduction." Jürgen Backhaus. Editor. 1998. Christian Wolff and Law and Economics. The Heilbronn Symposium. Hildesheim: Georg Olms Verlag, pp. V-X.
Folland, Sherman, Goodman, Allen C. and Stano, Miron. 2001 (3). The Economics of Health and Health Care. Upper Saddle River: Prentice Hall.
Fuchs, Victor R. 1986. The Health Economy. Cambridge, Massachusetts: Harvard University Press.
Getzen, Thomas E. 1997. Health Economics: Fundamentals and Flow of Funds. New York: John Wiley & Sons, Inc.
Goldscheid, Rudolf. 1908. Entwicklungswerttheorie, Entwicklungsökonomie, Menschenökonomie . (Value Theory of Development, Economics of Development, Economics of the Human Being). Leipzig: Werner Klinkhardt.
Kenessey, Zoltan. 1995. "The Emergence of Quantitative Thinking about Mortality and Life Expectancy." International Review of Comparative Public Policy. Vol. 6, pp. 291-311.
Klinger, Andreas. “Veit Ludwig von Seckendorff’s “Fürsten Stat“ and the Duchy of Saxe-Gotha.“ European Journal of Law and Economics . Issue 19.3 – special issue “Veit Ludwig von Seckendorff (1626-1692),“ pp. 249-266.
Leidl, Reiner. 1993. Gesundheitsökonomie als wissenschaftliches Fachgebiet. (Health Economics as a Scientific Field). Inaugural Lecture, University of Limburg, 10-21-1993.
Mooney, Gavin. 1986. Economics, Medicine and Health Care . Brighton: Wheatsheaf.
Oppenheimer, Franz. 1896. 1922 (3). Die Siedlungsgenossenschaft. (The Cooperative Settlement for Development). Jena: Fischer.
Roscher, Wilhelm. 1894. Geschichte der National-Oekonomik in Deutschland . (History of Economics in Germany). München: R. Oldenbourg. See Chapter 20, pp. 430-479.
Seckendorf, Veit Ludwig von. 1665. Teutscher Fürsten Stat . (German State of Princes). New edition. Two volumes. Glashütten/Taunus: Detlev Auvermann. 1976. Reprint of the third corrected edition of 1665.
24
Schmähl, Winfried. 1997. "Avoiding Poverty in Old Age by an Obligatory Contribution-Financed Minimum Insurance. Leopold Krug's `Poor Man's Insurance' of 1810 in the Light of Present Day Discussions." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Backhaus, Jürgen. Editor. Marburg: Metropolis, pp. 15-33.
Schmoller, Gustav von. 1870. Zur Geschichte des deutschen Kleingewerbes im 19. Jahrhundert. (Towards a History of Small German Crafts and Industry in the 19th Century). Halle.
Schmoller, Gustav von. 1923. Grundriß der allgemeinen Volkswirtschaftslehre . Erster Teil. (Blueprint, Vol. I). München, Leipzig: Duncker & Humblot,
Schumpeter, Joseph A. 1912. "Das Gesamtbild der Volkswirtschaft." (The Economy as a Whole). Theorie der wirtschaftlichen Entwicklung . (The Theory of Economic Development). Leipzig: Duncker & Humblot, pp. 463-546. English translation by Ursula Backhaus. 2002. " The Economy as a Whole . Seventh Chapter of Schumpeter's The Theory of Economic Development . Joseph A. Schumpeter." Industry and Innovation . Vol. 9, nrs. 1/2, pp. 93-145.
Vereeck, Lode. 1993. The Economics of Science and Scholarship. An Analysis of the Althoff System. Maastricht: Universitaire Press Maastricht. German translation by Ursula Backhaus. L.M.C. Vereeck. 2001. Das deutsche Wissenschaftswunder. Eine ökonomische Analyse des Systems Althoff (1882-1907). Volkswirtschaftliche Schriften, Vol. 514. Berlin: Duncker & Humblot.
Wagner, Richard E. 1977. "Economic Manipulation for Political Profit: Macroeconomic Consequences and Constitutional Implications." Kyklos, Vol. 30, pp. 395-410.
25
26
Chapter 2
Paracelsus, Theophrast von Hohenheim (1493-1541):
A Holistic Approach to Health Including the Social Scientific Point of View
Contents
2.1 Introduction: Paracelsus, his Life and Holistic Approach
2.2 Economic Thoughts in Paracelsus’ Social Writings
2.3 Monopolies in Health Care
2.4 Summary and Conclusions
An earlier version of this chapter has been published 2003 in Economic Policy in an Orderly Framework . Liber Amicorum for Gerrit Meijer. Jürgen G. Backhaus, Wim Heijman, Andries Nentjes, Johan van Ophem (Eds.), Münster: LIT Verlag, pp. 63-87.
27
2.1 Introduction:
Paracelsus, his Life and Holistic Approach
More than five hundred years ago, Theophrastus Bombastus von Hohenheim (1493- 1541), who called himself Paracelsus, was born at Einsiedeln (Switzerland) as the son of a German physician and chemist, Wilhelm Bombast von Hohenheim. Today, his achievements in the areas of medicine, philosophy, linguistics, and theology are widely acknowledged. Many of the works by Paracelsus have been published posthumously. Only between 1549 and 1658, 175 editions appeared. The research by Karl Sudhoff, who edited fourteen volumes of his medical and philosophical work created a scientific basis for further investigation. 1 For his social-political writings he is less well known, because this work has been found very late in order to be included in the complete Paracelsus edition. 2 It contains his contributions to comprehensive health sciences and health economic aspects, which are the focus of this chapter.
Paracelsus received his early education from his father. At the age of sixteen he went to Basel University, but soon abandoned his studies at Basel for the study of chemistry and alchemy under Withemina, the Bishop of Würzburg. He continued his studies in Tübingen, Heidelberg, Leipzig, Vienna and Ferrara. In 1515 or 1516 he received his doctorate in both medicines (i.e., internal and external) in Ferrara. 3
From 1516 until about 1524, he traveled widely through Europe. He sustained himself by his continually moving practice as he normally did not stay longer than three months at the same place. He cured the famous as well as the poor; among his famous patients was Erasmus of Rotterdam. Paracelsus collected a vast amount
1 Paracelsus. 1922 - 1933. Theophrast von Hohenheim, gen. Paracelsus. Sämtliche Werke . (Theophrast von Hohenheim, called Paracelsus. Complete Works). I. Abteilung. Medizinische, naturwissenschaftliche und philosophische Schriften . (Medical, Scientific and Philosophical Writings). Karl Sudhoff. Editor. 14 Volumes. II. Abteilung. Die theologischen und religionsphilosophischen Schriften . (Studies on Theology and Philosophy of Religion). Karl Sudhoff and W. Matthießen. Editors. 10 Volumes. Reprint Hildesheim: Olms. 2 The most important editions containing social writings by Paracelsus are: Kurt Goldammer, Editor. Paracelsus. 1952. Sozialethische und sozialphilosophische Schriften . (Social-ethical and social-philosophical Works). Tübingen: J.C.B. Mohr (Paul Siebeck); and Jacobi, Jolande, Editor. Paracelsus. 1991 (revised and new edition, the older edition is of 1951). Paracelsus. Arzt und Gottsucher an der Zeitenwende . (Paracelsus. Physician and in Search of God at the Turn of the Times). Selected Works. With an introduction by Gerhard Wehr. Olten and Freiburg/Breisgau: Walter-Verlag. 3 Jürgen Backhaus. 1995 "Introduction: Paracelsus (1493 - 1541): His Relevance for Modern Health Related Policy." International Review of Comparative Public Policy . Vol. 6, pp. xiii-xxii, p. xvi. 28
of medical knowledge not only through the study of medicine, but also through observation, experience and contacts with barbers, healers, gypsies, and executioners practicing folk medicine. He served some time as a military surgeon in the Low Countries, Denmark, and Italy, and learned practical metallurgy at the mines in Tirol. The mines belonged to the Fugger family, who took patronage of Paracelsus' work. In the mines he studied the processes of preparing metals and conducted experiments as to their medicinal virtues. He also found out that particular diseases of miners were caused by the metals they were exposed to in the mine. 4 Between 1520 and 1522, he wrote early monographs on the diseases of miners. Around 1525, 1526 he wrote the draft towards an Alchemia medica with the goal to separate the effective medicine from its ineffective part. 5
In 1527, Paracelsus was appointed city physician at Basel. Related to that position was a professorship of medicine at the University of Basel. He introduced fundamental changes in the way and method of teaching. It was the tradition to teach in Latin, but Paracelsus gave his lectures in the German language. The study of medicine used to be theoretical. Paracelsus however required his students to actually see patients and to become practical physicians. Basing the knowledge of students on experience meant a revolution in the way of teaching. 6
Paracelsus was compelled to leave Basel in 1528. He had made enemies in Basel, among them the guilt of the pharmacists, because he fought against high prices of medicine. The issue that led to his dismissal was an unsettled question about his honorarium. When he treated successfully a dignitary of the church, the cured patient did not want to pay him the full amount of the pre-negotiated honorarium, but only a small portion of it. He went to court in order to get the full honorarium, but the judge decided the case in favor of the church dignitary and he ordered Paracelsus to leave town. (Hanel, 1995, op. cit ., p. 12.) Paracelsus resumed his wanderings mostly through the South of Germany, Switzerland, and Austria. In 1541, Paracelsus returned to Salzburg, where he died in 1541. The circumstances of his death were related to payment. When he went to a patient's house to gather his honorarium for a treatment that he had performed, but for which he never had been paid, he found that the patient, in the meantime, was treated by another doctor. Paracelsus became his victim, because that doctor ordered the servants to throw him out of the window.
Paracelsus work not only had an influence on medicine, but also on disciplines such as theology, philosophy, astronomy, linguistics and psychology. Often, Paracelsus would invent new names, because the words he found in the established systems
4 "Paracelsus." 1923 2. The New International Encyclopaedia . Vol. XYIII. New York: Dodd, Mead and Company. 5 Compare p. C-463, Udo Benzendörfer. 1993. "In allen Bereichen begehrte er gegen die Autoritäten auf." (In all Areas, he Revolted against the Authorities.) Deutsches Ärzteblatt . Vol. 90/10, pp. C-463 - C-465. 6 Johannes Hanel. 1995. "Paracelsus' Social Writings from a Modern Social Science Point of View." International Review of Comparative Public Policy . Vol. 6, pp. 3-128, p. 5. 29
were inadequate to describe the facts he observed. His vocabulary is studied by linguists, who focus on the development of the German language. In the fragmentary Valumen Paramirum , which belongs to his early writings around 1520, his holistic approach becomes clear. Paracelsus distinguished between five different spheres, which have an influence in causing illness: the cosmic sphere; the environment; factors of heritage; spiritual disturbances; and God's will. God is thought to send illness as a way of punishment.
Three major medical works by Paracelsus can be distinguished. In his book Paragranum , written around 1529/30, he devised a program of a new medicine based on four pillars: "Philosophia," the natural sciences and natural philosophy; "Astronomia," the cosmic influence on humans; "Alchemia," the teachings of medicine based on chemistry; and "Proprietas," the duties of the physician derived from a Christian ethically point of view. His Opus Paramirum , written around 1531, contains basic observations on the causes of illness, as well as philosophical ideas. The Grosse Wundtartzney (Large Handbook for the Healing of Wounds) was printed in two parts in 1535. In the first part, he advised for a conservative treatment of wounds, supporting the self-healing capability of patients; the focus of the second part was on internal medicine.
Paracelsus exerted a profound influence upon the medical beliefs of his time and found followers who continued his work. He destroyed the "humoral pathology," which was founded on the belief that diseases depend upon an excess or deficiency of bile, phlegm, or blood and taught instead that diseases were actual entities and were to be combated with specific remedies.7 Paracelsus denounced the medicine of the Arab physicians, whose teachings were then generally followed. 8 He laid the
7 Paracelsus publicly burned the works of Galen. Galen (c. 129-200) was a Greek physician, whose main work has been translated into the Arab language. He was the physician to several Roman emperors and learned about the organs from dissection of animals. He was the first physician to describe diagnosis from the pulse. "Galen's writings were regarded as almost infallible both in the East and the West until well into the sixteenth century ... He believed strongly in pneuma , a word untranslatable by any single English word, but which strongly resembles "spirit" or "breath of life" ... In addition to the doctrine of the pneuma , Galen held the Hippocratic view of the four humors and their accompanying types of emotion: blood (sanguine), phlegm (phlegmatic), black bile (melancholy), and yellow bile (choleric). These Galen related to the classical doctrine of the four elements: earth, air, fire, and water." "Galen," Collier's Encyclopedia . 1995. New York: Collier's. Vol. 10, p. 538. 8 Based on the Greek medicine, Arab medicine had a strong impact on the course medicine took, and looks back at a long history. For instance, Arab physicians were experts at distillation and developed many drugs for treatment of illnesses. Rhazes (c. 850), an alchemist from Baghdad, distinguished between measles and smallpox. He founded a hospital in Baghdad and wrote a Graeco-Arabic medical encyclopaedia. See Norris McWhirter. 1999. "Medicine and Health." The Book of Millenium Records . London: Virgin Publishing Ltd., pp. 90-97. p. 90. 30
groundwork for pharmaceutical medicine; he introduced new remedies, for instance opium, mercury, sulphur, iron, arsenic, etc. and strove to reduce the overdosing then practiced. A famous follower of Paracelsus was Johann Baptist von Helmont (1579- 1644), who improved his work on pharmaceutical chemistry. 9
Paracelsus’ holistic approach had an important influence on Goethe and C. G. Jung. Goethe read Paracelsus in a time when he suffered from a serious illness. He “recognized medicine's indebtedness to the tradition of "holism" when he commented in his autobiography "Medicine employs the whole man, because it is occupied with the whole man." 10 Paracelsus not only saw the physical side of an illness, but also the soul of a patient and the social circumstances, the patient lived in.
Paracelsus’ holistic approach also inspired C. G. Jung: “When Carl Gustav Jung in our century explained his analytical psychology, which treated the physical, emotional, social, and spiritual dimensions of the person, he referred to the writings of Paracelsus as a helpmeet in articulating his perspective.” (Blum, op. cit. , p. 250). The results of C. G. Jung's analytical psychology are still relevant in the cure of some mental disorders such as drug addiction. A promising area of application of this line of research lies in the outpatient treatment of mentally ill persons. Blum has developed and implemented such an out-patient program, which allows drug addicts to delineate the cultural variables, which impact their life. In an out-patient program, the patients can maintain their social and economic activities, and by relying on facts from the patients' environment, the therapist can provide them with better guidelines than in an in-patient program. From a cost-effectiveness standpoint, out-patient programs tend to be preferred to in-patient programs. 11
During his lifetime, Paracelsus continuously had the problem that competitors would reprint and alter his medical texts. There were, of course, no copyrights. His social science related writings were not subject to the same plagiarism and vandalism as they have more the character of a public good and hence were not subject to stealing. This is why his social science writings have remained more authentic and also shed light on his medical writings. He was a holistic author who saw the practice of medicine always in the context of societal circumstances, in which it had to occur.12 The context with economic issues is the main focus of this chapter (2.2).
9 Keil, Gundolf. 1995. "Paracelsus und die neuen Krankheiten." (Paracelsus and the New Diseases). Editor: Zimmermann, Volker. Paracelsus. Das Werk - Die Rezeption . (Paracelsus. Work and Reception). Stuttgart: Franz Steiner Verlag, pp. 17-46. 10 Mark E. Blum. 1993. "Paracelsus, Goethe, and C. G. Jung: The Logic of Individuation and Its Implications for Health Care - An Abstract." Footnotes omitted. Jürgen Backhaus. Volume editor. International Review of Comparative Public Policy , Vol. 6, pp. 245-274. 11 Compare Burton A. Weisbrod. 1983. Economics and Medical Research . Washington and London: American Enterprise Institute for Public Policy Research. 12 Paracelsus. 1952, op. cit . For an overview of Paracelsus’ social writings 31
Economic consequences of monopolies in health care are the subject of the third section (2.3). The chapter ends with a summary and conclusions.
2.2 Economic Thoughts in Paracelsus’ Social Writings
Paracelsus was a devoted physician, theologian and philosopher, who distinguished among several realms of which a society is composed.
Therefore there are four estates (ordine, monarchias), as there are one agriculture, another crafts, a third the liberal arts, a fourth the government (authority, magistracy). 13
According to Paracelsus, medicine and medical care belonged to the third monarchia, the liberal arts.
Now in the third monarchia, there are many arts and sciences, which God revealed, as astronomia, medicina. These arts and labor cannot be paid. For who can pay a good physician who brings you back lost health and keeps you alive, until the last minute comes? 14
Paracelsus oftentimes pondered about the nature of medicine. On the one hand, he considered medical care a priceless service, but on the other hand, he noted that patients faced a high risk of treatment, because the medical scientific knowledge of his time was uncertain, medical cures were not reliable and physicians were frequently not able to help.
All the time, and with great and unrelenting efforts I have tried to understand the basic reason of medicine, in order to understand whether medicine can really be called an art, or not, and what basically it consists in. I have been driven in this by various causes. Among them are the uncertainty with which our treatments are wrought, which is reflected in the low esteem and the lack of applause of our daily practice: likewise, that so many patients perish: that they die, remain paralyzed, or are abandoned by their doctors. And this is not only the case with respect to just particular conditions; it is true for pretty much all the conditions. Our entire practice is unreliable. In my time, there is not a single doctor who would be able to heal a toothache with certainty, nor
compare Johannes Hanel. 1995. "Paracelsus' Social Writings from a Modern Social Science Point of View." International Review of Comparative Public Policy . Vol. 6, pp. 3-128. 13 Paracelsus. 1952, op. cit. , p. 118. Tanslation of the quote by Johannes Hanel, 1995, op. cit ., p. 3. 14 Paracelsus, 1952, op. cit ., p. 126. This quote by Paracelsus and the translation is according to Johannes Hanel, 1995, op. cit ., p. 3. 32
an even smaller illness, not to speak of a serious illness at all. 15
The struggling physician even wanted to give up his career, because he thought that the medical practice could never become a reliable art.
Never have I made the experience that I can ever be completely sure about the effect of a medical practice and cure, no matter what kind of illness it was. I have thought about it a lot, that medical practice is an unreliable art, which cannot be used adequately, the right cure is hard to find, even under the best of circumstances and with luck heals one, but makes ten others ill. This gave me a reason to think that it is a betrayal of spirits in order to deceive men and to make them small. 16
At other times, Paracelsus was able to overcome these feelings; then, he decided that medicine and medical practice was an art, indeed, "... that the art is true, just, reliable, perfect and a unity, in times of need a reliable indispensable art, useful for all the ill, and helpful for them to become healthy." 17 The following examples show that despite this decision, the nature of medicine kept occupying his thinking. On the one hand, Paracelsus thought that physicians were not able to provide adequate treatment, because they lacked the knowledge required, or the risk of treatment involved was too high, or a medical cure did not exist. On the other hand, dishonest
15 Translation by Jürgen Backhaus (1995, op. cit. , p. xvi). The original German quote reads as follows: "Allerwärts die Arzneikunst erforscht. Ich hab je und je mit großem Aufsehen fleißiger Arbeit mich geflissen zu erfahren den Grund in der Arznei, ob sie doch möge eine Kunst geheißen werden, oder sein, oder nicht, oder was doch in ihr seie. Denn dazu hat mich bewegt vielerlei Ursach, nämlich das Ungewisse des Fürnehmens in dem, daß so wenig Lob und Ehr mit sampt den Werken erschienen sind, daß soviel Kranken verdorben, getöt, erlähmt und gar verlassen worden sind. Nit allein in einer Krankheit, sondern gar nahet in allen Krankheiten. Also ungewiß war. Daß doch bei meinen Zeiten kein Artz gewesen ist, der doch nur gewiß möchte ein Zahnweh heilen, oder noch ein minders, geschweig große Krankheit." Paracelsus. 1944. Paracelsus. Leben und Lebensweisheit in Selbstzeugnissen . (Paracelsus. His Life and Truths of Life in Autobiographical Notes). Edited and with an introduction by Karl Bittel. Leipzig: Verlag Philipp Reclam. (10:19) 16 This paragraph reads in the original German as follows: "Hab aber so ganz gründlich nicht mögen erfahren, gewiß zu sein, es sei in was Krankheit es wöll. Hab ihm viel nachgedacht, daß die Arznei ein ungewisse Kunst sei, die nicht gebührlich sei zu gebrauchen, nicht billig mit Glück zu treffen, einen gesund macht, zehn dagegen verderbt. Das mir ein Ursach geben hat, es sei ein Betrügnis von Geistern, den Menschen also zu verführen und gering zu machen." Paracelsus, 1944, op. cit ., (10:19). 17 The original German quote reads as follows: "... die Kunst wahrhaftig, gerecht, gewiß, vollkommen und ganz wär, in Nöten eine bewährte nothafte Kunst, allen Kranken nützlich und behilflich zu ihrer Gesundheit." Paracelsus, 1944, op. cit ., (10:19). 33
doctors could take advantage of the uncertain nature of medicine, because patients could not control them.
Paracelsus wondered how patients could tell whether a treatment was good or bad, if even physicians did not know the effect of a treatment with certainty. This was aggravated by the fact that some illnesses would disappear after a while without treatment and others despite of the wrong treatment. Moreover, the effects of medical cures varied among different patients. In this situation, patients could not control physicians' behavior. Therefore, doctors were able to become rich, while oftentimes providing bad treatment. A lack of patients' control, resulting from the nature of medicine, opened the opportunity to fraud for deceitful physicians and, so Paracelsus, the medical profession was therefore not honored more highly.
Paracelsus despised of book knowledge, because he felt that the books did not teach about the risks involved in treatment. As will be shown later in this section, Paracelsus wanted to lower the risk of treatment by learning more about cures and illnesses at different locations and from various health care providers. He thought that book knowledge opened another opportunity to physicians' fraud and this he considered foolishness. He accused the well-established physicians, who relied on book knowledge, of not primarily being interested in providing good medical care, but in gaining a high status and income.
Such foolishness I have also found in the writings of all the old. And this despite the fact that at the courts, in the large cities, at the rich - who had been willing to pay so much (!) and yet have not been able to be helped by any of the physicians - I am talking about the well-dressed physicians wearing silk, golden rings, etc., not the unimportant ones, but those with pomp and kind words. 18
Those physicians took advantage of the fact that the rich patients in the cities and at the courts who are in poor health are not able to conduct their daily business as usual. They have much more to lose than any of the poor patients. Consequently, they are willing and also able to pay a higher sum in order to gain their health back than the poor.
Paracelsus observed many different ways of dishonesty and fraud among physicians which damaged the reputation of medicine. He noted that some physicians were able to increase their income by not admitting that the chance of healing was very small. They made the patients believe that they would get better with continued medical treatment. While those physicians were eager to take their patients'
18 This quote reads in the original German as follows: "Auch bei allen Alten solche Torheit gefunden in ihren Gschriften und darbei gesehen bei den Fürstenhöfen, bei den großen Städten, bei den Reichen, daß sie so groß Gut erbieten zu geben und doch bei allen Arzten verlassen waren in der Hilf, die doch in Seiden, gulden Ringen usw. gingen, nit mit kleinem Namen, Pracht und Geschwätz." Paracelsus, 1944, op. cit. , (10:19). 34
payments, they did not provide adequate treatment in return. Paracelsus scorned those physicians, who for monetary reasons concentrated on the diagnosis and forgot treatment and all limitations of life. 19 He also described physicians who abandoned patients, because they could not help them any longer, or because a patient was no longer able to pay for treatment.
Some of his colleagues applied bad and ineffective cures. As a physician, Paracelsus was better able to recognize such bad and ineffective cures than the patients. His fellow physicians, however, did not appreciate that kind of control. They criticized the alternative treatment Paracelsus provided; in other cases they copied his procedures or stole his medicine. Paracelsus reported the following case: when his family doctor was not able to help a patient, Paracelsus, who happened to be in the vicinity, was called in. He was promised a generous honorarium, reimbursement for his travel expenses, as well as free room and board. Paracelsus accepted the offer and performed a chiropractic treatment in order to help the patient. While he performed the treatment, the other doctor looked on, partially learning the treatment. Later, his room was broken into and his medicine was stolen. He did not get paid, neither for his travel expenses, nor did he get the honorarium that was promised to him. Paracelsus considered those physicians as fools, whom he fought fiercely, and concentrated on the patients who did appreciate his cures.
The sick liked me. I wrote this letter, because I do not want to insult any of the honest physicians by my bad-tempered writing. I hope to live with them in peace and to get their praise. The other fools I do not honor. Their scolding is my praise, it is to my benefit, and it fills my purse. For I know so many of those evildoers that among thousand physicians, there will not be a single one, who will say: thank you, Theophraste, but you are a fool! The war between us has been going on for so long. They forced me to leave Lithuania, thereafter Prussia, thereafter Poland, this was not enough. Neither did the Dutch like me, nor the universities, nor the Jews, nor the monks. But thank God: the sick liked me. 20
Paracelsus was forced by his enemies to leave the country, university, or monastery.
19 In his theological and philosophical contributions, Paracelsus addressed the question of the limitations of life; he even foresaw the possibility of genetic modifications. Compare Johannes Hanel, 1995, op. cit. , p. 4. 20 The original German quote reads as follows: "Den Kranken gefiel ich wohl. In diesem meinem Schreiben will ich, daß mir kein getreuer Arzt nicht für arg aufnehm mein hitzig Schreiben, verhoff auch vor ihnen gut Ruh zu haben und gut Lob. Der andern Zottler achte ich nicht, ihr schelten ist mein Lob, mein Nutz und meins Seckels Fug. Denn ich weiß der Bescheißer so viel, daß unter 1000 Arzten nicht einer sprechen wird: Theophraste, hab dank, aber er ist ein Narr! Unser Krieg ist lang gangen gegen einander. Sie trieben mich aus Littau, darnach aus Preußen, darnach aus Poland, war nich genug. Ich gefiel den Niederlendern auch nicht, den Universitäten nicht, weder Jüden noch Mönchen. Ich dank aber Gott: den Kranken gefiel ich." Paracelsus, 1944, op. cit ., (6:180). 35
They tried to exclude him on the basis of admission regulations and accused him of not being a physician. Paracelsus responded by citing his battlefield experience: 21
According to your judgment, I am a surgeon, not a physician. How do you arrive at such a judgment? This is despite the fact that I have evidently healed eighteen princes - who had been abandoned by you - and you have not even acknowledged this. And also despite the fact that I have treated and healed large numbers of the feverish, for about forty different illnesses that had been found, in the Low Lands, Romania, Naples, and in the wars of Venice, Denmark, and the Netherlands. 22
Facing hostility around him and inspired by a high sense of responsibility for God and towards his fellow men, Paracelsus' strategy was to extend and deepen his medical knowledge, thereby improving medical cures, and to apply his knowledge widely. He noted that the success of a medical cure also depended on the persons close to the patient. In order to succeed in healing a patient, the patient's family and friends have to be supportive. It depends on their intentions and behavior, whether a physician will be able to help a patient. According to Paracelsus, any treatment remains ineffective, if the family or friends do not want a recovery of the patient. In that case, the best medicine "gets spilled, the patient dies, the recipients of a bequest become lucky, the physician gets insulted, and the art of medicine dishonored." 23
21 In treating the wounded at the battlefield, it was important to prevent the outbreak of an epidemic. Paracelsus cures were not only directed towards healing single wounded soldiers, but towards prevention of infection. In the case of infectious diseases, he tried to reduce the danger of infection. At times, however, it seems that Paracelus was more concerned with the development of social medicine than with individually effective treatment. An example is his treatment of syphilis with quicksilver. Much later it became obvious that treatment with quicksilver was perhaps not the best method of helping the individual patient, but it prevented the disease from spreading. Decades later, the syphilis treatment with quicksilver was replaced by a method that was based on the former heat therapy Paracelsus had rejected. For individual treatment, the heat therapy turned out to be the better method. Gundolf Keil. 1995. "Paracelsus und die neuen Krankheiten." Editor: Zimmermann, Volker. Paracelsus. Das Werk - Die Rezeption . (Paracelsus. Work and Reception). Stuttgart: Franz Steiner Verlag, pp. 17-46, p. 44. 22 The original German quote reads as follows: "Ich soll nach eurem Urteil ein Chirurgus sein und kein Physikus. Womit wöllet ihr das beurteiln, dieweil ich doch offenbarlich 18 Fürsten - durch euch verlassen - in Physica aufgebracht hab; ohne Ruhm zu schreiben. Dieweil ich auch im Niderland, in der Romanei, in Neapolis, in Venedischen, Denemarkischen und Niderlendischen Kriegen so treffliche Summa der Fiebrigen aufbracht und ob den 40erlei Leibkrankheiten, so in denselben funden worden, in Gesundheit aufgericht." Paracelsus. 1944, op. cit ., (7:374). 23 The original German quote from a footnote by Paracelsus reads as follows: "... 36
As has been mentioned above, Paracelsus did not find reliable medical knowledge in the books. Therefore, he decided to gather the knowledge of effective cures through extended wanderings, by using "his eyes as his professors." He visited various practitioners of health care, such as barbers, midwives, etc., and investigated home remedies in order to develop reliable alternative cures. This was not without personal hardships and sacrifices. Paracelsus noted: "Thus I wandered through the countries and led a vagrant life - alone, and foreign, and different." 24
Paracelsus wanted to improve the knowledge of medical practice and treatments, thereby making cures more reliable. He insisted that the only way of gaining the experience needed was to wander through the different countries with their varying conditions of climate and geography. Only then, sufficient comparison between medical cures could be achieved.
Thus I have studied at the Universities for many years, in Germany, in Italy, in France, in search for the nature of the medical art. I did not want to rely on the same teachers and to base my knowledge on their writings and books only, but wandered further to Granada, to Lisbon through Spain, through England, through the Mark Brandenburg, through Prussia, through Lithuania, through Poland, Hungary, Walachia, Transylvania, Croatia, the Wendian Mark, also other countries, not necessarily to be mentioned here. And in all the places and locations I inquired busily and diligently, did research in order to find the art of medical practice that was surely working and really experienced. I got this knowledge not only from the doctors, but also from barbers, bath keepers, learned physicians, women, from witches, as far as they have concerned themselves with caring, from alchemists, I went to the monasteries, to the noble and common people, to the bright and to the simple-minded. 25
dann wird des Arzts Arznei verschütt, der Krank verderbt, die Erben erfreut, der Arzt beleidigt, die Kunst geschändet." Paracelsus, 1944, op. cit. , footnote, p. 58. 24 The German quote reads as follows: "Also bin ich gewandlet durch die Länder und ein Peregrinus gewest meine Zeit - allein und fremd und anders." Johannes Hanel, 1995, op. cit ., p. 9, note 13. 25 This quote reads in the original German as follows: "Hab also die Hohen Schulen erfahren lange Jahr bei den Teutschen, bei den Italischen, bei den Frankreichischen und den Grund der Arznei gesucht. Mich nit allein derselbigen Lehrer und Gschriften, Bücher ergeben wöllen, sonder weiter gewandert gen Granaten (Granada), gen Lizabone durch Hispanien, durch Engeland, durch den Mark, durch Prüchsen (Preußen), durch Litau, durch Poland, Ungern, Walachi, Sibenbürgen, Crabaten (Kroatien), Windisch mark, auch sonst andere Länder, nit not zu erzählen. Und in allen den Enden und Orten fleißig und emsig nachgefragt, Erforschung gehabt, gewisser und erfahrner wahrhaften Künsten der Arznei. Nicht allein bei den Doctoren, sondern auch bei den Scherern, Badern, gelehrten Arzten, Weibern, Schwarzkünstlern, so sich des Pflegen, Alchemisten, bei den Klösten, bei Edlen und Unedlen, bei den Gescheiten und Einfältigen. Paracelsus, 1944, op. cit. , (10:19). 37
Paracelsus wandered through Europe, but limited the application of his medical knowledge to this continent. He considered it not to be useful to go to Africa and America. He believed that the cures had to be found in the immediate vicinity of the disease. One had to adapt therapies to individual needs. According to Paracelsus, climate and other environmental conditions would influence the course of a disease. (Hanel, op.cit ., p.10.)
Paracelsus often developed medicine himself in order to adapt it to an individual patient and his immediate environment. If the effective ingredient was cheap to produce, this easily caused a problem with pharmacists, who did not want to sell Paracelsus' medications as fees and consequently their incomes would obviously depend on the materials provided. In order to make it more expensive, he sometimes added precious ingredients such as ground pearls or spices to medicine that would not be damaging to the patient. He did this only in the case of rich patients. Poor patients just got the basic formula which he prepared himself, so he did not have to send them to the apothecary.
In a letter of complaint to the council of the city of Basel, where he was the city physician and at the same time had the position of a professor, Paracelsus demanded stronger controls of apothecaries. He asked for professional visitations of apothecaries, demanded an oath of pharmacists, and wanted a city physician to control patients' recipes. He further demanded independency between pharmacists and physicians and an evaluation of a pharmacist's experience and knowledge. 26 He recognized that this letter of complaint could have adverse consequences for him, as well as for his patients. The pharmacists' guild was the driving force behind the city's decision that Paracelsus had to leave town.
Another monopoly criticized by Paracelsus was that of the influential Fuggers, who at one point in time funded his research in their mines. The first medical work by Paracelsus that was published during his lifetime was "On the thorough Healing Power of the Wood Guajak," 1529. He criticized the use of the wood that was imported around 1514 from South America to Europe and sold by the Fuggers for healing syphilis. An incidence is reported, where Paracelsus accused the Fuggers of selling an ineffective and expensive cure against syphilis. "... Their wood ... had no other effect than that it added to their own benefit, while they knew that in their own country houses and alleys were full of the ill, whose illness has been made worse by
26 Paracelsus, 1944, op. cit. , 4 : 141, p. 45. Paracelsus was probably aware of the edict issued by Frederik II in 1240 that prohibited combining the functions of physician and pharmacist. With this edict, Frederik II achieved a higher differentiation of the medical profession and prevented that physicians would have an immediate interest in increasing their own income by prescriptions. Compare Philipp Herder-Dorneich. 1994. Ökonomische Theorie des Gesundheitswesens: Problemgeschichte, Problembereiche, Theoretische Grundlagen . (Economic Theory of Health Care: History of the Field, Relevant Areas, and Theoretical Bases). Baden-Baden: Nomos-Verlag. 38
the wood." 27 The Fuggers established large trade monopolies; their business encompassed the trade in basic ingredients of medicine. Measures against the monopolies of large trade houses had been decided by the Imperial Diet, but remained ineffective, because the emperor depended on the Fuggers' money in order to finance the budget. (Hanel, op. cit ., p. 60.)
Paracelsus thought that monopolies could be prevented by a supreme government. He wanted the Emperor to keep the power to himself. The Emperor should be inspired by God and act only according to God's will. Then, clergy, nobility, and traders could not acquire and misuse power. Trade houses could not, with the help of courts and governments, establish monopolies and charge high prices. (Hanel, op. cit ., p. 68.)
Another concern by Paracelsus was the question of the honorarium of the physician. His thought sometimes overlaps with what has been discussed above because of the physician’s position as a local monopolist. Paracelsus noted that the services of a good physician are of immense value, but that it can be extremely difficult to collect the payment once the patient has recovered. As soon as patients get better, they would only want to pay a small amount and some even tried to avoid payment.
They cheated by not paying the physician's honorarium. It is the manner of the patients that they try to deceive the physician. If one of them is healed, then he does not want to pay anymore. But not only the patients, also at court one judges about a physician's honorarium as if he would "make shoes," despite the fact that one faces the risk for ones own life. If a treatment is not successful, then one wants to pay nothing at all; if it is successful, then the patients hide so that they do not see the doctor any more; this is worse than the devil. They like him if he charges nothing. But they start to scold and shame him if his services are not for free. No money is just earned und given less willingly than the doctor's fee (honorarium). Money is given willingly for playing games, prostitution, and drinking. But people are reluctant to pay in the case that they are helped with a bodily need; all sick people are of the same opinion. 28
27 The German quote reads as follows: "Vom Holtz Guaiaco gründlicher heylung." The original German quote reads as follows: "... ir holtz ..., welches es doch niergendumb anders gebracht hatten, dan inen selbst zu irem nuz, und wußtent, das in seinem eignen land heuser und gassen voll kranken lagen, die das holz verderbt hatte." Johannes Hanel, 1995, op. cit ., p. 104, note 185. 28 The German quote reads as follows: "Um das Arzthonorar betrogen. Der Kranken Art ist, daß sie den Arzt empfindlich bescheißen. So nun einer genest, so begehrn sie im nüt drumb zu geben. Dann nit allein die Kranken, sondern auch am Gericht, dort urteilt man darüber, als wär es "schuhmachen", da einer muß sein Leib und Leben wagen. Mißrät es, so will man gar nichts tun; geräts wohl, so verbergen sie sich, daß sie den Arzt nimmer sehen; ist böser, als der Teufel. Schenkt ers, ists gut, wo nit, so gehts ans schelten und verachten. Kein Geld wird baß verdient und übler gegeben als dieser Lidlohn (Honorar). Spielen, 39
Paracelsus reported that patients did not want to pay for an unsuccessful treatment. When it was successful, some patients would hide, when it came to paying. In Basel, Paracelsus made a bad experience with a judge. When he went to court in order to get his pre-negotiated honorarium (as noted above), he was ordered to leave town. Paracelsus complained that courts did not realize the difference between a shoemaker and a physician. He argued that the physician needed a risk premium for risking his own life, while the shoemaker would not be confronted with such a risk.
Why, so asked Paracelsus, did people willingly pay for playing, prostitutes, and drinking and not for medical services? We can only speculate about the answer. Due to his wanderings, Paracelsus might not have been around long enough to build up long term relationships with patients. In a long term relationship, it would not make sense for a patient to hide, when it comes to paying. The patient would pay voluntarily, because in case of illness, he wanted to be treated again in the future. As Paracelsus moved around so often, he could not build up trust in a long term relationship, but had to rely on a short run input evaluation.
Paracelsus observation that patients only want to make a small payment or no payment at all upon recovery refers to the subjective evaluation of health lost, health gained back, and death avoided, which can be explained in a human capital framework. One could expect that no amount of money could compensate a person for dying if is assumed that the person 1) derives a positive utility from living, 2) does not have a very strong bequest motive, and 3) does not want to give up life in order to fulfill a particular mission for society. That person should be willing to spend all of her or his resources in order to avoid death, because the value of life is infinite to her or him. In the case of immediate death, those resources have lost all value, since the person cannot use them anymore. This means that the resources have no opportunity costs. Therefore, the subjective cost of spending all money is zero to the person, who wants to avoid immediate death. Similarly, in the case of a severe illness, the opportunity costs of resources can be expected to be relatively low. 29
In the extreme case of death avoided, the subjective evaluation of life is very high, but the patients’ subjective evaluation changes when their health improves. With better health they have gained a more promising future, which makes their resources more valuable. Opportunity costs of resources are no longer zero or very low as in the case of immediate death. Due to the recovery, patients face much higher opportunity costs of resources. Consequently, recovered patients might try to reduce or even avoid the payment that they were originally willing to make. Paracelsus has
huren, saufen, das ist alles gutwillige Zahlung. Aber Leibesnot abzuwenden, ist aller Kranken Meinung, gar nit drum zu geben." Paracelsus, 1944, op. cit . (6:180). 29 These conclusions can only be drawn under the assumption that patients behave rationally. Richard A. Posner. 1995. Aging and Old Age . Chicago and London: The University of Chicago Press. Compare "The Dread of Death," pp. 108-115, p. 110. 40
observed this phenomenon, but without providing the explanation that can be obtained in a human capital framework. He offered two main causes as an alternative explanation why a physician, in his own words, is "not honored more," in other words, not considered worth the "honorarium" or payment.
Paracelsus' first explanation referred to what is called today an asymmetry in information on the side of the patients. He had observed the paradox that patients, who are very ill, have a high willingness to pay, but if they become healthy, their willingness to pay is low. Therefore, he concluded that patients cannot evaluate the services of a good doctor. He argued that patients do not know how much effort and scholarship is involved by a physician, who wants to arrive at a good therapy. In his own case, the effort consisted in his wanderings, through which he gained empirical evidence and arrived at effective therapies; and because of this asymmetry in information, Paracelsus proposed to charge the patients according to their income or wealth.
His second explanation of the paradox that patients wanted to pay less upon recovery than before concerned the risk involved in treatment and the possibilities of fraud this offered to a deceitful doctor. Paracelsus thought that the physician was not honored more by the recovered patients, and consequently his treatment not thought to be worth the payment, because of the risk involved in treatment. Due to the unreliability of medical knowledge, the risk of treatment was very high at the time. Paracelsus described some “fools,” fellow physicians, who for reasons of self- interest would even aggravate the risk of treatment. He considered their behavior as despicable.
Paracelsus demanded that one should help the poor by sharing available means; they should not be treated as beggars, but as honorable people. 30 In his payment practice, Paracelsus treated poor patients for free. He wanted people to make voluntary charitable contributions in order to finance the provision of health care to the poor. (Hanel, op. cit ., p. 7.) His own testament is an example for this practice. After his death, he wanted most of his wealth to be distributed among the poor. 31
During his lifetime, Paracelsus' books got censured and he thought it was because he demanded to provide health care to the poor for free. After the censorship of Nuremberg prohibited publishing his works, he could for a long time not find print houses and publishers for his writings. (Paracelsus, 1944, op. cit. , p. 64.) He sold his writings through markets, where they oftentimes got plagiarized. He therefore wanted an author's copyright.
Paracelsus input-based explanation of the physician's fee is not incompatible with an
30 René Bernoulli. 1995. "Über die Sozialethik des Arztes Paracelsus." (On the Social Ethics of the Physician Paracelsus). Editor: Volker Zimmermann. Paracelsus. Das Werk - Die Rezeption . (Paracelsus. Work and Reception). Stuttgart: Franz Steiner Verlag, pp. 137-146, p. 145. 31 Paracelsus, 1944, op. cit. , "Testament of September 21, 1541," pp. 120- 124. 41
alternative, the explanation according to the opportunity cost principle. He treated people according to the opportunity cost principle. Let us assume that he could only ask for payment, if the treatment was successful. Then, he set the price according to how important recovery was to the patient. The richer a patient, the higher his opportunity costs of illness could be expected to be, because he was not able to look after his daily business. This principle is consistent with Paracelsus ethical approach. Those patients, who could not afford payment, do not lose much by being ill. Therefore, their opportunity cost of illness, in monetary terms, can be assumed to be zero. This is consistent with no payment at all. On the other hand, by treating the poor, Paracelsus himself gained additional experience and knowledge, thereby making treatments more reliable. Not charging the poor caused problems with some local doctors and the more affluent patients. For instance, they forced Paracelsus to leave Salzburg, when he helped peasants, who could not afford a physician. (Hanel, op. cit ., p. 5.)
In this section, we have seen that more than 500 years ago, Paracelsus has made important contributions to economic issues of health. Next to his thoughts about the honorarium, he showed that not only the medical practice is relevant for the performance of medicine, but also the way how the provision of health care is organized. Paracelsus has shown that monopolies in health care can have negative consequences. For instance, he fought against the practices of pharmacies who charged patients prices higher than necessary for a medicine prescribed. He criticized powerful local physicians, who would concentrate on the diagnosis and not try to gain additional knowledge in order to improve the quality of health care provided. He criticized the Fuggers for excluding effective therapies. They had formed a monopoly through which they provided only particular ingredients for medical uses. He suffered from censorship of his writings; and he criticized the language monopoly. By lecturing in German, he made it possible for those students to study medicine, who did not know the Latin language.
2.3 Monopolies in Health Care
Paracelsus criticized the exclusion of therapies and talents by the organization of health care provision. Similar effects of monopolies in health care can also be seen in more modern examples. 32 The consequences of monopolization in health care services will typically take the form of restricting supply in order to increase physicians' fees. This was shown empirically by Reuben Kessel for specific chapters of the American Medical Association (AMA) and their overall, i. e. national approach of licensing medical schools. 33 Only licensed schools according to their standard
32 Compare the contribution by Andries Nentjes, 2002. "The Structure of Dutch Health Care." Presentation at the 15th Workshop in Law and Economics, March 27-28, Erfurt. 33 Reuben A. Kessel. 1970. "The A.M.A. and the Supply of Physicians." Editors: Ronald H. Coase and Merton H. Miller. 1980. Essays in Applied Price Theory by 42
could graduate physical doctors.
The analysis of the organization of the AMA by Kessel is an example of rent- seeking. 34 Rents are defined as "a return in excess of a resource owner's opportunity costs." 35 Rents can either arise in the price system, and then, they are equivalent to profit seeking, or rents can be contrived artificially through regulatory government actions transferring wealth from one group to another. If there is competition for these artificially contrived rents, then the process of using resources to contrive the rents is referred to as rent-seeking. Resources used in the competitive process to win a transfer are wasted from a society's point of view. Rent-seeking refers to this wasteful process. It does not lead to productive gains. On the normative side, rent- seeking theory specifies and estimates the costs of rent-seeking behavior to the economy. Positive rent-seeking theory as applied in the analysis by Kessel addresses the question of why contrived rents exist in the economy, or more specifically, in certain sectors of the economy such as the health care sector, and not in others.
In the United States, physicians can only be licensed if they have graduated from an accredited medical school. The accrediting authority is the AMA, a private institution. If accreditation is withheld, fewer students will be trained and therefore, the supply of physicians will be curtailed. With the help of governmental powers, the AMA restrained the output of physicians. Kessel showed empirically that the practice of admission with respect to accreditation of medical schools led to an artificial shortage of physicians. This made it possible for physicians to demand above average fees. Instrumental to the reduction of the number of physicians was the Flexner report of 1910. On request of the AMA, the influential Carnegie Foundation commissioned Abraham Flexner to evaluate proprietary medical schools. (Kessel, op. cit ., p. 38.) Flexner discredited many medical schools. This did not occur on the basis of quality considerations. The criterion rather was whether the medical training program of a particular school was similar to that of Johns Hopkins University. Graduates from discredited schools were not allowed to participate in the state licensure examinations. Therefore, many of the discredited medical schools were forced to close. As a consequence, the number of physicians declined.
At the remaining universities, it became more expensive for students to acquire the degree of "Medical Doctor." The higher costs for students made it more difficult for minorities to become physicians. In particular to black students the requirement of internship in a hospital posed a barrier, because they often were not hired for reasons of discrimination. Kessel noted a sharp decline in the number of black doctors and the closure of many black medical schools. Another result of the implementation of Flexner's report was that the medical training of students exhibited
Reuben A. Kessel . Chicago and London: The University of Chicago Press, pp. 37-53, p. 37. 34 Gordon Tullock. 1967. "The Welfare Costs of Monopolies, Tariffs and Theft." Western Economic Journal . 5.3, pp. 224-232. 35 Robert D. Tollison. 1982. "Rent Seeking: A Survey." Kyklos . 35.4, p. 575. 43
relatively little variation from school to school. This training pattern of medical students was frequently written into state laws. (Kessel, op. cit ., p. 39.)
Kessel noted that most of Flexner's work had been done by the AMA before, but that they had hidden their self-interest by implying the influential Carnegie Foundation. There was evidence of discrimination: the higher standards of quality did not apply to the majority of practitioners already in existence; there were no re-examination requirements for doctors; appointment decisions in hospitals were not simply made on the basis of quality; and there was great internal solidarity and cohesion within the medical profession, which made it unlikely that one doctor would testify against another one. (Kessel, op. cit ., pp. 44, 45.)
The example of the AMA shows that organized medicine used the power of government by successfully lobbying for a system of state licensing, which allowed setting up a practice only to physicians from accredited school. Moreover, the AMA used litigation by bringing suit against some practitioners who lacked the required education. Before the Flexner report was issued, medical educators could license their own graduates. The introduction of state licensing allowed a reduction in the number of physicians in order to increase the fees of individual physicians. State laws fixing the training pattern of medical students are evidence for rent-seeking as well. The effects were a less diversified student body and the exclusion of certain therapies. It took until the 1960s before the policy changed. The number of electives open to students increased and the costs to become a medical doctor decreased, but Kessel noted that the number of physicians trained was still not allowed to increase significantly. (Kessel, op. cit ., p. 46.)
The AMA systematically excluded other therapies such as homeopathy, osteopathy, and chiropractic treatment. While homeopaths were important competitors to American physicians in the mid nineteenth century, they virtually disappeared during the first decade of the twentieth century. The medicine used and prescribed by homeopaths became subject to regulation. 36 Regulation of ethical drugs (i. e. drugs that require prescription) is part of the mission of the American Food and Drug Administration. With the help of pure food and drug legislation, organized physicians were able to suppress competition from unpatented medicine vendors.
Chiropractic treatment survived the attacks of the AMA by forming its own Association and organizing a counter lobby exposing the restrictive practices of the AMA. Chiropractors cited boycotts of newspapers containing advertisements of alternative medicine by the AMA as well as a strong increase of press releases written by organized physicians. They protested against the use of the Latin language: "By requiring collegiate training before medical school and the use of Latin prescriptions, the AMA had erected artificial barriers designed to elevate the physician and intimidate the patient." (Martin, op. cit. , p. 166). Chiropractors cited the requirement of Latin for physicians as an additional barrier of entry posed by
36 Steven C. Martin. 1995. "A History of Chiropractic." Editor: Kenneth F. Kiple. The Cambridge World History of Human Disease . Pp. 164-170, p. 164. 44
theAMA. Five hundred years earlier, Paracelsus fought against the knowledge of Latin as an entry requirement for physicians. The victory for the chiropractors came in 1987 with the defeat of the AMA in a major lawsuit. 37
Graphically, the rent-seeking situation can be depicted as follows:
p D Excess fees and services forgone
M pm
N C
p* D
0 q m q * q
Figure: Rent-Seeking in a Monopoly
In the diagram, q represents the total supply of physicians and p stands for the price of medical services; p * is the price for medical services, which would prevail in a market where physicians have to compete for patients. Suppose the market for medical services is characterized by a downward sloping and linear demand curve. The AMA artificially restricted the number of physicians from q * to q m. The number of physicians, q m, is smaller than that of a competitive market, q *, and the price charged, p m, is higher than that at the competitive market, p *. The rent to be captured and/or dissipated by the costs of rent-seeking consists of monopoly revenue minus revenue if no monopoly is present. It amounts to the price difference (pm – p*) multiplied with the restricted number of physicians/quantity of services (q m), pmMNp*.
37 Wilk v. American Medical Association. 1987. 671 F. Supp. 1465 (N. D. Ill.). Quoted by Steven C. Martin, 1995, op. cit ., p. 170. 45
The Harberger triangle MNC describes the welfare loss to society, when moving from a competitive situation to a monopoly, but the welfare loss to society from monopoly is much bigger than depicted by the Harberger triangle. 38 Tullock denoted the rectangle pmMNp* as the potential rent to the monopolist, which is used up as costs of rent-seeking.
The rectangle p mMNp* denotes the potential for waste to society, if monopolists spent resources to capture the rent. Harberger's analysis is in a static context, whereas Tullock refers to a dynamic process. With the theory of rent-seeking he developed an instrument to analyze this dynamic process. When moving from a competitive industry to a monopoly, then we can assume constancy of the cost curve only in the first step; beyond, the cost curves will change.
Once a monopoly has been established, the external pressure to keep costs low is weakened and X-inefficiency may and probably will creep in. This can also be considered as a type of rent dissipation. Further insights on the dynamics of monopoly creation can be gained from Schumpeter. 39
The AMA caused the decline of the number of physicians, which allowed an increase in physicians' incomes. The AMA also pursued the exclusion of certain therapies by practitioners other than physicians; and it restrained the diversity of students trained as physicians. We can speak of a case of rent-seeking, because the organized physicians took advantage of the help of government and of the legal system. In the case of the AMA, the gains of rent-seeking consisted in the fee-revenue enjoyed by physicians in excess of the market clearing fees. The losses to society, represented by the dead-weight loss MNC, consisted in these extra fees, including the cost of that slack which a monopoly structure brings about, as well as in the reduction of the level of care, both quantity and quality, and in the non-availability of certain therapies.
Under normal conditions of rent-seeking, Tullock's rectangle is a sheer waste to society; the case discussed, a reduction in the supply of physicians, can hardly qualify as a cost-containment measure. The theory of rent-seeking also contains a different case, however. It is possible to use Tullock's rectangle as a prize in order to
38 Instead of using the term "profit," Tullock used the term “rent” to describe the return to the monopoly. By creating a sphere of exclusivity, the factor over which exclusive use has been defined becomes the subject of a monopoly. By implication, the owner of this artificially scarce factor enjoys the monopolist’s rent. The rent can be turned into a pure monopoly profit or else be used for other purposes. In the case of the AMA, a side effect was the introduction of “professional medical practices” at the expense of the traditional medical practices, partly owed to the Indians. Compare Robert D. Tollison, op. cit ., p. 579. 39 Joseph A. Schumpeter. 1961. The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest, and the Business Cycle . New York: Oxford University Press. 46
stimulate a desired outcome. In that case, the rectangle is not a societal waste. It could therefore be possible to design cost-containment measures in terms of a rent- seeking game by giving the rectangle in the form of a prize for better treatments achieved at lower costs. Patents for drugs are the standard example of such a rent- seeking arrangement in society's interest. 40
Paracelsus' oftentimes idiosyncratic musings are by no means as far fetched as they have been depicted in the literature over the last several centuries. Without stepping into the details of specific member states of the European Union, the following set of constellations can readily be found. They all illustrate Paracelsus' concerns in simple microeconomic terms. We have seen that professional groups can exploit the legal system and form a monopoly. This leads to volume restrictions and a higher price. Next to such examples of market failure we also observe government failure in health care. In a nationalized health care system, or in a highly regulated health care system, the state itself can act as a monopsony and appropriate the monopsony rent. Health care fees are kept low and volume of health care services provided is restricted. Neither health care providers, nor patients can easily circumvent government controls. Under these conditions, waiting lines are likely to result. As Buchanan and Tullock have variously pointed out, market failure cannot be construed as a cause for government to intervene. One first has to show that governments can perform better than the market.
2.4 Summary and Conclusions
Why it is useful to dig out an author who has written some five hundred years ago? After five hundred years have passed, Paracelsus offers such a fascination that his social-economic work is still being edited. He identified the structure of the medical profession not only in relationship to the nature of medicine, but also in relationship to local circumstances, such as city regulations, regulations by guilts or requirements by universities. His examples of the honorarium of the physician, as well as early forms of crime and misconduct by medical doctors and pharmacists highlight the tension between the practice of medicine as a profession and as a business. His approach is holistic. In particular, he tried to integrate pharmacology and medical science, but in a broader context is is also seeking the integration with what today are the social sciences.
Paracelsus' put the medical science on an empirical footing. He overcame Aristotelian medicine and showed that the functioning of bodies relies on a chemical basis. An example is his early research on miners' diseases where he looked at the environment as a factor causing illness. Through his research in the mines of the
40 Backhaus, Jürgen. 1983. "Competition, Innovation and Regulation in the Pharmaceutical Industry." Managerial and Decision Economics . Vol. 4, Nr. 2, pp. 107-121. 47
Fuggers, Paracelsus laid the basis for pharmaceutical chemistry. In his holistic approach, he went beyond pharmacy and tried to integrate physical, chemical, and economic variables.
Paracelsus’ holistic approach to health had an impact on Goethe and C. G. Jung. It found application in the treatment of certain mental illnesses, for instance by the concept of an out-patient treatment for drug addicts (Blum). Holistic medicine seeks to make the patients participants in their own cure. They become agents, who share responsibilities with the health professional. This takes off part of the pressure of the health care professional. The patients monitor the variables in their conditions and will be guided to make changes in their behavior and environment that facilitate healing. Comparisons by health economists of in-patient and out-patient programs show that for some mental illnesses out-patient programs tend to be less costly and more successful than in-patient programs.
The immediate environment of the patient mattered to Paracelsus. He adjusted therapies to individual needs and tried to find the effective ingredient for medicine in a patient’s immediate environment. If the medicine was inexpensive, this caused problems with apothecaries, because pharmacists did not want to sell his medicine. As has been shown in the chapter, Paracelsus recognized the problem as one of organization and demanded controls and the abolishment of monopolistic structures.
The question of honorarium received Paracelsus’ attention on several occations. He thought that no one could pay a physician the true value for what a treatment was actually worth. This thought is expressed by the term "honorarium," because more is at stake than an exchange of money for certain services; the physician is honored for his work; the value of his services is recognized. However, a dilemma occurred when patients, who recovered, did not want to pay much or did not want to pay at all. Paracelsus explained this dilemma with two major reasons.
On the one hand, he thought that the honorarium should reimburse the physician for his scholarship and his efforts required to arrive at effective cures. The patients could not really know how much effort was needed to become proficient. Paracelsus improved the quality of health care provision by advancing the knowledge of medical art and practices, as well as by pointing out deceitful practices. Instead of book knowledge, he concentrated on other typically not documented sources such as barbers' experience, healers' practices, and midwifes' knowledge. Therefore, Paracelsus charged the patients according to income and wealth.
On the other hand, Paracelsus thought that the medical profession was not honored more due to the uncertain nature of medicine. In his time, knowledge was not always proven, cures were unreliable or there were no cures at all, and there was a high risk of treatment. This opened the door to fraudulent behavior of deceitful doctors, who were more interested in gaining a high income and getting the status of a doctor than in helping patients. Through his wanderings, he not only found useful experience, but also many deceitful practices in the supply of health care.
48
It was the Fuggers, who provided Paracelsus with the means to conduct his path breaking research in their mines. Paracelsus criticized them for making profits by selling ineffective medicine, such as the wood Guajak, thereby excluding the more effective therapies. As has been noted above, the pharmacists, acting as a monopoly, often did not want to sell Paracelsus’ medicine, because it was too cheap and would not generate enough income. He accused the pharmacists’ guilt of Basel of exploiting the situation. Ironically, research results today show that the competitive process of large pharmaceutical industry goes through innovations. Here, a monopoly offers the security to develop and carry through an innovation. This does not take away that in a monopoly inefficiency can creep in.
How much progress have we made in five hundred years? The honorarium of the physician is still an issue that keeps health economists busy. Monopolies in health care are still present. They are justified by the presence of increasing returns, for instance in the case of highly specialized treatment, or, as we have seen in the case of the pharmaceutical industry, in order to facilitate innovations. But have we found the appropriate means to deal with the disadvantages of monopolies? The introduction of diagnosis-related groups in hospitals or pre-paid practices have increased competition in health care, but waiting lines, a decrease in health care quality, and non-availability of certain therapies can still be observed in modern, European health care systems.
From the point of view of modern health policy, Paracelsus cannot be overlooked as he overcame the deductive Aristotelian tradition in medicine and put the practice on a thorough empirical footing. This provides the basis for sensible statistical investigations that can lead to equally sensible and helpful policy solutions. The downside is even more important. Many politicians in Sub-Saharan Africa claim to see a correlation between poverty and AIDS. In their view, the therapy would be financial aid to their (perhaps corrupt) governments. 41 From the point of view of Paracelsus, there is no empirically testable theory that can provide a link between poverty and the incidence of AIDS. The current discussion about the AIDS epidemic in Sub-Saharan Africa is based on the spurious notion of a correlation between poverty and AIDS. This basically Marxist reasoning is not helpful for current health policy as it neglects Paracelsus’ advice to look for the causes of a disease at its roots. Claims that the root of a particular disease lies in a socioeconomic aggregate such as poverty can have disastrous effects on both health and economic policy if they are believed. Five hundred years ago, Paracelsus tried to overcome such prescientific approaches by establishing relationships between physical, chemical, and economic variables.
41 Governments that are not controlled by a court of audit. 49
References
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Backhaus, Jürgen. 1995. Volume editor. "Introduction: Paracelsus (1493 - 1541): His Relevance for Modern Health Related Policy." International Review of Comparative Public Policy , Vol. 6, pp. xiii-xxii, p. xvi.
Backhaus, Ursula. 2003. "What Health Economic Lessons Can We Draw from the Work of Paracelsus, Theophrast von Hohenheim (1493-1541)?" Economic Policy in an Orderly Framework . Liber Amicorum for Gerrit Meijer. Jürgen G. Backhaus, Wim Heijman, Andries Nentjes, Johan van Ophem (Eds.) Münster: LIT Verlag, pp. 63-87.
Benzendörfer, Udo. 1993. "In allen Bereichen begehrte er gegen die Autoritäten auf." (In all Areas, he Revolted against the Authorities.) Deutsches Ärzteblatt . Vol. 90/10, pp. C-463 - C-465, p. C-463.
Bernoulli, René. 1995. "Über die Sozialethik des Arztes Paracelsus." (On the Social Ethics of the Physician Paracelsus). Editor: Zimmermann, Volker. Paracelsus. Das Werk - Die Rezeption . (Paracelsus. Work and Reception). Stuttgart: Franz Steiner Verlag, pp. 137-146.
Blum, Mark E. 1995. "Paracelsus, Goethe, and C. G. Jung: The Logic of Individuation and Its Implications for Health Care - An Abstract." International Review of Comparative Public Policy , Vol. 6, pp. 245-274.
Clair, Jeffrey Michael, and Allman, Richard M. Editors. 1993. Sociomedical Perspectives on Patient Care . Lexington, Kentucky: The University Press of Kentucky.
Herder-Dorneich, Philipp. 1994. Ökonomische Theorie des Gesundheitswesens: Problemgeschichte, Problembereiche, Theoretische Grundlagen . (Economic Theory of Health Care: History of the Field, Relevant Areas, and Theoretical Bases). Baden- Baden: Nomos-Verlag.
Epstein, Richard A. 1997. Mortal Peril . Reading, MS: Addison Wesley Publishing Company.
Getzen, Thomas E. 1997. Health Economics: Fundamentals and Flow of Funds . New York: John Wiley & Sons.
Hanel, Johannes. 1995. "Paracelsus' Social Writings from a Modern Social Science 50
Point of View." International Review of Comparative Public Policy , Vol. 6, pp. 3-128.
Keil, Gundolf. 1995. "Paracelsus und die neuen Krankheiten." (Paracelsus and the New Diseases). Editor: Zimmermann, Volker. Paracelsus. Das Werk - Die Rezeption . (Paracelsus. Work and Reception). Stuttgart: Franz Steiner Verlag, pp. 17-46.
Kessel, Reuben A. 1970. "The A.M.A. and the Supply of Physicians." Editors: Ronald H. Coase and Merton H. Miller. 1980. Essays in Applied Price Theory by Reuben A. Kessel . Chicago and London: The University of Chicago Press, pp. 37-53.
Martin, Steven C. 1995. "A History of Chiropractic." Editor: Kenneth F. Kiple. The Cambridge World History of Human Disease . pp. 164-170, p. 164.
McWhirter, Norris. 1999. "Medicine and Health." The Book of Millenium Records , London: Virgin Publishing Ltd., pp. 90-97.
Nentjes, Andries. 2002. "The Structure of Dutch Health Care." Presentation at the 15th Workshop in Law and Economics, March 27-28, Erfurt.
Paracelsus. 1922 - 1933. Theophrast von Hohenheim, gen. Paracelsus. Sämtliche Werke . (Theophrast von Hohenheim, called Paracelsus. Complete Works). I. Abteilung. Medizinische, naturwissenschaftliche und philosophische Schriften . (Medical, Scientific and Philosophical Writings). Sudhoff, Karl. Editor. 14 Volumes. Reprint Hildesheim: Olms. II. Abteilung. Die theologischen und religionsphilosophischen Schriften . (Studies on Theology and Philosophy of Religion). Sudhoff, Karl and Matthießen, W. Editors. 10 Volumes.
Paracelsus. 1944. Paracelsus. Leben und Lebensweisheit in Selbstzeugnissen . (Paracelsus. His Life and Truths of Life in Autobiographical Notes). Karl Bittel. Editor. Leipzig: Verlag Philipp Reclam.
Paracelsus. 1952. Sozialethische und sozialphilosophische Schriften . (Social-Ethical and Social-Philosophical Works). Kurt Goldammer, Editor. Tübingen: J.C.B. Mohr (Paul Siebeck).
Paracelsus. 1991. Paracelsus. Arzt und Gottsucher an der Zeitenwende . (Paracelsus. Physician and in Search of God at the Turn of the Times). Selected Works. Jacobi, Jolande, Editor. With an introduction by Gerhard Wehr. Olten and Freiburg/Breisgau: Walter-Verlag.
Posner, Richard A. 1995. Aging and Old Age . Chicago and London: The University of Chicago Press.
Joseph A. Schumpeter. 1961. The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest, and the Business Cycle . New York: Oxford University Press. 51
The New International Encyclopaedia . "Paracelsus." 1923 2. Vol. XYIII. New York: Dodd, Mead and Company, pp. 36, 37.
Tollison, Robert D. 1982. "Rent Seeking: A Survey." Kyklos . Vol. 35, Fasc. 4, pp. 575-602.
Tullock, Gordon. 1967. "The Welfare Costs of Monopolies, Tariffs and Theft." Western Economic Journal . 5.3, pp. 224-232.
Webster, Charles. 1982. 1996 (2). From Paracelsus to Newton. Magic & the Making of Modern Science . USA: Barnes and Noble, Inc.
Werner, Helmut. 1989. Mikrokosmos und Makrokosmos. Okkulte Schriften von Paracelsus . (Microcosmos and Macrocosmos. Occult Writings by Paracelsus). Munich: Eugen Diederichs Verlag.
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Chapter 3
Christian Freiherr von Wolff (1679-1754):
The House as the Relevant Context of Health Provision
Contents
3.1 Introduction:
Christian (Freiherr von) Wolff, his Life and Approach
3.2 Wolff's Basic Thoughts on Health
3.3 Duties of Men
3.4 The Principle of Subsidiarity
3.5 An Illustrative Application of Wolff's Thought
3.6 Summary and Conclusions
This chapter is based on my publication: 1995, "Bibliography of the Economic Works of Christian Freiherr von Wolff." Prolegomena to the Seventh Heilbronn Symposium on Economics and the Social Sciences. "Christian Freiherr von Wolff (1679-1754)." June 22-25, 1995. Discussion paper No. Wp/95/004, University of Limburg, pp. 7-43.
55
3.1 Introduction :
Christian (Freiherr von) Wolff, his Life and Approach
Christian Freiherr von Wolff (1679-1754) was a scholar who is primarily known for his contributions to theoretical and applied philosophy, natural law, and logic. 1 By founding economics within the general system of natural law ( jus gentium ), he connected legal and economic analysis and thus created the field of political economy. 2 This allowed analyzing administrative practices and developing methods of economic policies. Wolff thus created the intellectual background for the development of Cameralism. 3 In 1727, the first chairs for Cameral Sciences had been created at two Prussian Universities, Halle and Frankfurt on the Oder. While Wolff proposed a systematic pattern for the organization of the social sciences and their methodology, he did not deal as extensively with economic or social problems as the Cameralists did later. (Compare chapter 3 on Justi).
From the point of view of an economic analysis of health issues his concept is challenging. For every aspect of life, his focus was on the household and not on the individuals. This is important, since much health related services can best be provided within the immediate vicinity of the person to be treated. Even today, many such services are provided by the family directly. Conversely, individuals' health often depends directly on the lifestyle of the family. Wolff introduced the principle of subsidiarity. It is relevant in questions of occupational and environmental health that go beyond the control of individual households; there is a case of application when young people make provisions for old age; and it became an important principle in the health care policy of the European Union.
Born in Breslau (Silesia), Wolff attended the Lutheran School, where his intellectual capabilities became obvious early on, when he entered into discussions with pupils of
1 Wolff's complete works have been published by the publishing house of Olms which continuously takes care of Wolff research. Next to the works themselves, there is a series of works on Wolff. (The proceedings from the European Journal of Law and Economics have also been published there as a reprint.) In his general system of science, the relevant work on issues of health can be found in his Natural Law ( Jus Naturae , 1740). This has entered the economics literature through Roscher, Schmoller, and others. 2 Christian Wolff. 1754 Halle. 1980 Reprint. Grundsätze des Natur- und Völkerrechts . (Principles of Natural Law and the Law of Nations). Collected Works, 1. Division, German Writings, Vol. 19. Marcel Thomann. Editor. Hildesheim, New York: Olms. 3 Pribram described Leibniz and Wolff as providing the intellectual background for the development of Cameralism, when "members of the academic profession took over the work previously performed by government officials." Karl Pribram. 1983. A History of Economic Reasoning. Baltimore and London: The Johns Hopkins University Press, p. 94. 56
the rival Jesuit School. Wolff studied Divinity at the University of Jena, but after a brief stay, he went to Leipzig to study Mathematics and Natural Sciences. After graduating, he became a staff member of the first scholarly journal in Germany. He soon expanded his field by venturing into other areas within the Faculty of Arts. Upon recommendation of the universal scholar Gottfried Wilhelm Leibniz (1646-1716), Wolff was offered the chair of Mathematics at the University of Halle in 1706. He accepted the offer and in addition he got the chair of Physics in 1715. Wolff received international recognition for his scholarly work by being elected a Fellow of the Royal Society of London, upon which he was also honored at home by being nominated a member of the Berlin Academy. 4
In 1723, Wolff was expelled from Prussia after he had given his farewell address as vice rector. In this lecture, he described the principles of Chinese philosophy and ethics, mainly those of Confucianism, as basically being in line with his own moral judgments. By way of example, he referred to the Chinese as people who do not believe in one God, but whose lives and morals are based on natural principles. 5 This was perceived a provocation and gave his scholarly adversary, a pietist at the University of Halle, the opportunity to denunciate him. The pietists succeeded to convince the King of Prussia, Frederick William I (1688-1740), of Wolff's gross impiety and unsuitability. In an abrupt manner, the King dismissed Wolff, forcing him to leave the city of Halle and all Prussian lands within 48 hours.
Wolff went to Marburg in the state of Hesse, where he was offered a chair in Mathematics, Physics, and Philosophy. He was a gifted lecturer, doubled matriculation figures within five years, and also attracted international students. (Drechsler, op. cit. , p. 115). In Marburg, Wolff started rewriting his previous books in Latin in order to reach a wider audience. Among other honors that were bestowed upon him, Empress Catherine made him Honorary Professor of the Academy of St. Petersburg. During 1733, Wolff was elected one of eight foreign members of the Royal Academy of Paris.
In the meantime, Frederick William I took back his Anti-Wolffian orders, but he could not get Wolff to trust him. Only his successor Frederick II was able to persuade Wolff to return to Prussia in 1741. Wolff went back to the University of Halle as a Professor of Public Law and Mathematics. He received the title of a Privy Councilor and became Vice Chancellor, later Chancellor of the University. On the basis of his scholarly work, he was the first to become a "Reichsfreiherr" (Imperial Baron of the Roman Empire) in 1745. (Drechsler, op. cit. , p. 117).
Wolff's scientific approach can be traced back to Leibniz, but the extent to which
4 These biographical notes are mainly based on the biography by Wolfgang Drechsler, 1997, "Christian Wolff (1679-1754). A Biographical Essay." European Journal of Law and Economics. Kluwer. 4, pp. 111-128. 5 Heinrich Wuttke. Ed. 1841. Christian Wolffs eigene Lebensbeschreibung. (Christian Wolff's own Biography). Edited with a Treatise on Wolff. Leipzig: Weidmann'sche Buchhandlung. 57
Leibniz has influenced Wolff is still a matter of dispute. 6 At first, Wolff accepted Leibniz' work such as the theory of (individualistic) monads, but later, he developed his own concepts. For example, Leibniz considered the monads as the smallest indivisible units of life. This was in contrast to the atoms in physics, which he rejected on the ground that atoms having extension must be divisible. Leibniz considered the monads as organisms which he ranged on a continuous scale from conscious to unconscious. Their relation to each other was determined according to the idea of a preestablished harmony. (Pribram, op. cit. , p. 94). In contrast to Leibniz' theory of the monads or smallest elements, Wolff's emphasis was on the household as the smallest viable entity of production and consumption. 7 He systematized Leibniz' work, but went beyond in developing his own system of thought, thereby creating the basis of empirical social sciences.
Wolff is the founder of the natural law tradition of the modern welfare state. He thought that the state was preceded by an era of natural existence. This was a state of individual freedom regulated by the principles of natural law. The state arose out of a rational contract in order to provide for its citizens the greatest welfare and security. 8
Schmoller showed that Wolff and other authors of his time crafted systems of natural law that systematically displayed the entire legal and economic knowledge of their time. 9 He criticized that the historical dimension was missing in their work, but remarked that Wolff, Althusius, Pufendorf, and others took into account the reality of the seventeenth and eighteenth centuries. While Wolff's notion of the state is that of an abstract definition of contracts, we have to keep in mind that it also grew out of the phenomenon he witnessed in his time, namely many initiatives by small foundations, churches, the guilds, and other groups of persons. 10 The goal of the state is to maximize the welfare of its citizen.
Central to his thought is the principle of subsidiarity which he developed in the context
6 According to Senn it is still controversial to which extent Leibniz has influenced Wolff. Peter R. Senn. 1997. "What is the Place of Christian Wolff in the History of the Social Sciences?" European Journal of Law and Economics. 4, pp. 147-232, in particular pp. 158-164. 7 Jürgen Backhaus. 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics. Kluwer. 4, pp. 129-146, p. 132. 8 In this respect, Wolff differed from Hobbes who conceived of this era of natural existence as one of war of all against all. Koppel S. Pinson. 1935. "Wolff, Christian (1679-1754)." Encyclopedia of the Social Sciences . New York: McMillan, Volume 15, page 435. 9 Gustav Schmoller. 1923 (2). Grundriß der allgemeinen Volkswirtschaftslehre I . Munich/Leipzig: Duncker & Humblot, page 83. 10 Blickle, Peter. 2000. Kommunalismus. Skizzen einer gesellschaftlichen Organisationsform, dl. 1: Oberdeutschland, dl. 2: Europa . (Communalism). Munich: Oldenburg. 58
of his outline of natural law in the jus gentium .11 Wolff stated that the state has to shoulder those tasks, which other smaller entities cannot perform by themselves. He thus referred to the principle of subsidiarity not only as a limitation for the tasks of the state, but also as a duty of persons to take over responsibility for their own matters. 12 In the following, we will explore the implications of Wolff's concept of the principle of subsidiarity for health economics.
Wolff's method is characterized by the distinction between philosophy on the one hand and application or practical advice on the other.
Absolutely valid knowledge, or `truths of reason,' could be based only on fundamental, self-evident concepts. Empirical or historical knowledge should serve the purpose of ascertaining the truth by the deductive method. In accordance with this classification, every science was divided into two parts: one, the philosophical, was supposed to supply the conceptual and explanatory exposition; the other, empirical, part was required to provide the facts for verifying and amplifying the knowledge gained by deductive reasoning. As a priori sciences, ethics, politics, and economics were qualified as branches of philosophy and natural law. Technology and administrative practice were regarded as the corresponding empirical disciplines. (Pribram, op. cit. , p. 94).
The reason why Wolff went from philosophical problems to practical questions was his belief that the key to practical solutions of any problem lies in the understanding of the underlying philosophical issue. In this way, he made basic contributions to many disciplines.
Wolff combined the deductive method with a priori reasoning. The following example appeared in the context of an attack on Wolff's method of a priori reasoning by the French philosopher Etienne Bonnot de Mabley de Contillac and was an important factor in leading to the decline of Wolffianism in France. Wolff's attempt to calculate the size of the inhabitants of Jupiter might serve to illustrate his method of a priori reasoning:
Wolff first assumed that the size of the pupil of the eye was determined by the strength of the light which fell upon it. The size of the rest of the body was then supposed to be in proportion to that of the pupil. Working from assumptions about the comparative strength of the sunlight on Jupiter and on the earth, Wolff deduced
11 Jus gentium is "the law that was common to all nations," as opposed to jus civile , "the specific law proclaimed for a community by its duly established authorities and adjusted to particular social and political conditions." Karl Pribram, op. cit. , p. 8. 12 Jürgen Backhaus. 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics. Kluwer. 4, pp. 129-146. Compare in particular part III: "The subsidiarity principle: From Wolff's formulation to the treaty of Maastricht," pp. 135-36, and "Early formulations," pp. 136-139. 59
the size of the pupil und thus, the size of the inhabitants. (Senn, op. cit ., p. 161).
Wolff used the mathematical-deductive method and a priori reasoning in order to identify problems that could be brought to a political and administrative solution. (Senn, op. cit. , p. 161). The mathematical-deductive method became the method of mainstream economics, but in contrast to the methodological individualism Wolff assumed the household to be the relevant unit of decision making.
In what follows, we will first take a look at his methodological contributions to medicine and then turn to his social-economic thought which is basic to health economics.
3.2 Wolff's Basic Thought on Health
Wolff repeatedly referred to topics of medicine and health. In his overview on the state of medicine, he provided clear definitions of health (14) and illness (15), of what is natural, what is contrary to nature, and what is unnatural in the art of medicine (16), and he showed causes of illness (17). 13 He recommended the use of scientific research methods in medicine, so that the knowledge base in medicine could be improved. On that basis, better medical care could be provided. Wolff defined health according to the state of the art of medicine at his time: "A body will be healthy, if all of its parts are able to perform their functions well." 14 In addressing a shortcoming of Aristotelian medicine, he distinguished between symptoms and the disease itself. He defined symptoms as an indication of bad health. 15 In his view, illness also encompassed mental illness. In order to prevent illnesses from occurring, Wolff recommended taking a look at eating and drinking. The quality of food and cooking matters. He also recommended avoiding vices; for instance, he discouraged people from drinking too much wine. 16
13 Christian Wolff. 1736 Halle. 1981 Reprint. "14. Von dem Begriff der Gesundheit," pp. 334-377, "15. Von dem Begriff der Krankheit (1)," pp. 378-424, "16. Von dem Begriff des natürlichen, widernatürlichen und nicht natürlichen in der Arzneykunst (1)," pp. 425-467, "17. Von dem Begriff der Ursache der Krankheit (1)," pp. 468-507. Gesammelte Werke. Kleine Philosophische Schriften . I. Division, German Writings. (Collected Works). Vol. 21.1, Hildesheim, New York: Olms. 14 The original reads as follows: "Es wird also der Cörper in demjenigen Zustand gesund seyn, in welchem jegliche Theile geschikt befunden werden, ihre Verrichtungen zu leisten." Wolff, Christian. 1736 Halle. 1981 Reprint, Vol. 21.1, op. cit. , p. 347. 15 Wolff, Christian. 1755 Halle. 1983 Reprint. "Was ein Symptom sei." (Definition of a Symptom). Gesammelte Werke. Kleine Schriften . (Collected Works). I. Division, German Writings, Vol. 22. Jean Ecole. Editor. Hildesheim, New York: Olms, pp. 263-275. 16 Christian Wolff. 1740 Halle. 1981 Reprint. Vol. 21.2, op. cit. , pp. 855-882, Par. 20 on diet, cooking, and foods for healing; and 1740 Halle. 1981 Reprint. "Par. 60
Wolff not only gave definitions, but also investigated the influence of his philosophy on medicine. He distinguished between sciences and their methods on the one hand and applied arts on the other. Medicine is both, a science and an art. Applied arts excel by the very process of applying art. He postulated that medicine is characterized by uncertainty. No one could with absolute security predict the outcome of a treatment. Wolff suggested that only the systematic repetition of experiments and treatments could lead to an improvement of the art of medicine. Therefore, he gave physicians the recommendation to experiment. Physicians should learn from the methods as applied in astronomy. (Christian Wolff. 1937 Halle. 1981 Reprint. Vol. 21.3, op. cit. , p. 326). Astronomers arrived at scientific principles which they tested by experimentation for more than one generation. Similarly, one should try to arrive at such principles in medicine and subsequently improve upon them by experimentation. Those purported principles which turn out to be wrong should be discarded.
Wolff's methodological approach still stands to reason. He provided clear definitions and showed the way how to delineate scientific principles. 17 Wolff also broke the ground with respect to normative economics. In what follows, we will take a closer look at three of his normative concepts, namely the duties of men, the house as the basic unit of decision making, and the principle of subsidiarity.
3.3 Duties of Men
Men have to fulfill specific duties in order to further their own happiness and that of others, or welfare of society. 18 Wolff saw duties of the individuals for themselves, with respect to others and before God. 19 He argued that reproduction is an obligation of
406. Das Laster macht einen Menschen unglückseelig, oder ein Lasterhaffter ist unglückseelig." (Vices make a man unhappy, or someone with an immoral habit is unhappy). Vol. 21.5, op. cit. , pp. 529-530. 17 The following argument by Milton Friedman underlines the importance of Wolff's methodological approach. Friedman has maintained that confusion between positive and normative economics can hardly be avoided if there are lay experts in a field. Economics shares this fate with medicine, where personal beliefs and "home" remedies become important wherever convincing evidence for "expert" opinion is lacking. Milton Friedman. 1953. "The Methodology of Positive Economics." Essays in Positive Economics . Chicago: University of Chicago Press, pp. 3-43, pp. 3, 4. 18 Depending on the context, Wolff's notion of "Glückseligkeit" is translated as happiness, or, in relation to society and the state as welfare. In contrast, welfare in the modern sense tends to focus on distribution. 19 Wolff, Vol. 19, Principles of Natural Law , op. cit. , Par. 103-133, "Das vierte Hauptstück. Von den Pflichten des Menschen gegen sich selbst, und den Rechten, die damit verbunden sind." Par. 133-159, "Das fünfte Hauptstück. Von den Pflichten des Menschen gegen andere, und den Rechten, die mit 61
mankind. If children are born, parents have the duty to bring them up carefully, and this gives them certain rights to influence behavior and activities of their children. (Wolff. Preface to Vol. 19, Principles of Natural Law , op. cit. , pp. 4, 5). Similarly, a partner in a marriage has certain rights to influence the behavior of the other in order to raise children together. This is also true for servants working in the household of the master. In exchange for services, the master provides a living to the servants. This, so Wolff, gives the master certain rights over the servants.
Each individual has the duty to strive for happiness and lead a healthy life to achieve this goal. In particular,
... there are duties with respect to the soul, the body, and the outer state of men (Par. 57), and these duties have to be combined in such a way that not only one of the duties is being pursued, while the others are being neglected. And further, the man who owns more wealth, and who can spend more of his wealth and rely on more help from others, is obliged to render a higher performance. 20
In general, the duties men have to perform are performance oriented. Men have the duty to gain knowledge; 21 they have the duty to invent in order to make economic growth possible; as skills and individual abilities differ, men have the duty to share knowledge with those who are for instance not able to learn as well as they are themselves; men also have the duty to care for those who are disadvantaged; they have to care for those in bad health; they have to educate children; they have to teach children how to work, preferably by setting the good example. 22
Wolff's duties are deducted from his moral philosophy. In his speech on China
denselben verbunden sind." Par. 160-182, "Das sechste Hauptstück. Von den Pflichten gegen Gott." 20 The original German quote reads as follows: "Man hat also Pflichten gegen die Seele, gegen den Leib, und in Absicht auf den äußern Zustand (Par. 57), und dieselben sind zu verbinden; man muß sich nicht einer also befleißigen, daß die übrigen verabsäumet werden; und derjenige, der mehr Vermögen hat, und mehr anwenden kann, wie auch mehrere Hülfe von andern zu erwarten hat, ist auch ein mehreres zu leisten verbunden." Wolff, Vol. 19, Principles of Natural Law , op. cit. , Par. 103. 21 Wolff took the duty to learn seriously. In particular for women, Wolff has written an introduction into philosophy in the German language. At that time, it was not possible for women to attend a university. The successful completion of the school of Latin was the requirement for studies at the university, but women were not admitted to the school of Latin and did therefore not fulfill this requirement. 22 Erik Reinert and Arno Daastoel. 1997. "Exploring the Genesis of Economic Innovations: The Religious Gestalt-Switch and the Duty to Invent as Preconditions for Economic Growth." European Journal of Law and Economics . 4, pp. 233-283. 62
… he stressed the power of reason and showed his belief that it is possible to live a reasonable life. Reason, for him, should be the teacher and the principle governing all details of human life and might be called the law of nature. People should have a right conception of good and bad. On the basis of natural law, by which all human beings are governed, people should endeavor to make their inner life as well as outer life more complete. Good deeds are the activities of people trying to reform their characters and other situations toward completeness, while bad deeds are activities that lead people to a lesser, incomplete state. Happiness therefore is a result and not an object of human morals, which are considered to be given by nature.23
For three reasons, Wolff admired the morals of the Chinese, in particular those taught by Confucius. First, he found Chinese morals useful in daily life, because they did not only improve individual life, but could be applied to national politics as well. Secondly, he praised the educational system of China. It featured lower and upper schools. This school system led to mass education of the Chinese, and also provided possibilities of learning for future leadership positions. Thirdly, "Wolff noted that pregnant women were educated by music and instructive stories that were considered highly useful for the mental development of the fetus." 24 In the example, the mother's thinking can affect the fetus' mental development. This shows Wolff's concern of individual health as an influencing factor in determining the future development of people.
Wolff distinguished between duties of the person with respect to him- or herself and with respect to others. With respect to themselves, persons have to maintain their health. For this reason, suicide is not an option men have (Par. 112). In Par. 113, Wolff clearly stated the person's responsibility for his or her own health.
All parts of the body have to be maintained in a state that they can be used in their function. Men have the duty to maintain good health. They have to be careful not to get sick. Illness should not be caused by men's own faults. If someone becomes ill, he has to take efforts to become healthy again. 25
23 Kanamori, Shigenari. 1997. "Christian Wolff's Speech on Confucianism- Confucius as Compared with Wolff. European Journal of Law and Economics . 4, pp. 299-304, p. 302. 24 Kanamori, 1997, op. cit ., 303. Chinese medicine is based on the observation of nature. For instance, the influence of weather can cause an illness from the outside, if a person has not sufficient energy to resist the illness. Emotions can cause illnesses from the inside, whereby every strong emotional intensity has a negative meaning. In Chinese medicine, we miss bacteria and viruses causing illnesses. A critical review of the effects of Chinese methods of popular healing on society and its relationship to modern medicine has been written by Angela Ki Che Leung. 1995. "Diseases of the Premodern Period in China." Kenneth F. Kiple (Editor). The Cambridge World History of Human Disease. Cambridge: Cambridge University Press, pp. 354-360. 25 The original German quote reads as follows: "Da alle Theile des Leibes in dem Zustande sollen erhalten werden, daß sie zu ihrem Gebrauch geschickt sind 63
From the duty to maintain health follow individual rights to all those things, which allow the maintenance of life and health or which serve the purpose to regain health, such as the right to food, drinking-water, and medicine (Par. 114), as well as the right to clothing (Par. 115) and shelter (Par. 116). While men have the duty to work, a division of labor should take place that takes individual skills and differences in the ability-to-work into account. People should not damage their health by working too hard or by performing the wrong kind of work (Par. 124). They should behave cautiously in order not to risk an accident or even risk their life (Par. 133).
Wolff stated that the duties with respect to others are the same as the ones one has to follow with respect to oneself (Par. 133). Therefore, for instance, if suicide is not an option, euthanasia is not an option, either. No one should hurt a person or take the life of a person, even if that person wants it (Par. 141.)
3.4 The Principle of Subsidiarity
Wolff described the duties of men as means to reach the goal of life, which is happiness of people. He described the primary form, in which this takes place, as the house. Wolff saw the household, or house, as a functional unit. It was an organization which provided a living for its members. The members would have different skills and abilities. A house could encompass the members of several generations of a family, as well as entire families of the workers. The house also includes the sphere of production, not only that of consumption. A business could be connected to the house in order to provide an income, but there was a division of labor in the house and not only production for the market. Since at the time of Wolff the roles between husband and wife, master and apprentice, etc. were given and technology was largely unchanged despite Wolff's emphasis on technological progress, the division of labor is assumed to be given in the house. 26
(Par. 112); so ist der Mensch verbunden die Gesundheit zu hüten; damit er nämlich nicht durch seine Schuld in dieselbe verfalle. Wenn es sich aber zutragen sollte, daß er kranck würde; so muß er sich bemühen, daß er wieder gesund werden." Wolff, Vol. 19, Principles of Natural Law , op. cit. , Par. 113. 26 The "house" then is, as in modern economics, i.e. the new home economics, a locus of both, production and exchange. In the Chicago approach the household is not restricted to consumption, but includes the production of tailored services such as education, health care, the training of good habits, etc. These are also seen as capital, as they raise earnings later on. If we assume that the income and the time budget of the household are given and that there are only two activities of the household, buying articles of mass production and producing human capital in the household, then a substitution and income effect will arise in case of a price change. If the prices of mass production articles fall this is tantamount to increasing the household budget given the same basket of commodities demanded. The income effect gives rise to a substitution effect. 64
Men are always considered members of a house, unless stated otherwise. In the house, each member has to be careful of not hindering other members from fulfilling their duties. The house is the vehicle where men realize their strive for happiness in very basic terms (food and shelter), but also in spiritual terms which is part of the duties of men. We have seen above that it is the duty of a person to stay healthy; persons' individual health is part of and a condition for happiness of the entire household and one has also to contribute to the health of others. A household can maintain the individual health of its members in various ways. Measures of personal hygiene can be taken in the house. Cleaning the house and separating animals from the family quarters are important factors in preventing disease. By using a sensible diet the household can contribute to producing individual health. The household provides care of its members, in particular of children and of the elderly. Hence, basic functions of health care are to be provided in the house. The same is true for other basic functions resulting from the duties of men.
For people who do not belong to a house, Wolff recommended the following social- economic provisions. 27
In order for all subjects to lead a decent life, it is also necessary that the needy and the beggars receive what they require for their basic needs and, in order not to burden the subjects too much with requests for gifts and donations, one has to pay heed to what the natural law indicates on the subject of gifts and donations (section 488 ff.). Hence it is necessary to build houses of re-education where those who can work, but rather prefer the life of a beggar, learn how to work. Similarly, houses for the poor and destitute are necessary to provide for those who cannot earn their living with their own work and who have no relatives or friends who could support them. Further, it is necessary to have hospitals where the sick can be nourished and healed. At last, schools for the destitute need to be available in order to teach the children of poor parents, without asking for a fee, all those subjects, which for them to know is either necessary or useful. 28
The share of human capital produced in the household will rise, the cheaper the price of articles of mass production will get. 27 Jürgen Backhaus. 1989. Die Finanzierung des Wohlfahrtsstaats. Eine kleine Ortsbestimmung an Hand der Theoriegeschichte . (Financing the Welfare State). Inaugural Lecture, Maastricht, p. 6, 7. 28 The original quote reads as follows: Par. 1022. "Das Leben gehörig hinzubringen, wird auch erfordert, dass man vor die Dürftige und Bettler besorge, was zur Nothdurft des Lebens nöthig ist, und, damit die Unterthanen Betrachtung zu ziehen, was das Naturgesetz von den Allmosen fest setzt (Par. nicht gar zu sehr mit Allmosengeben beschwehret werden, ist in sorgfältige 488 seqq.). Daher sind Zuchthäuser aufzubauen, worinn diejenigen zur Arbeit angehalten werden müssen, welche, ob sie gleich Arbeiten könnten, doch lieber betteln wollen; ingleichen Armenhäuser, worinn man die dürftigen ernähret, die sich durch Arbeiten das nicht zu erwerben im Stande sind, was sie zur 65
If the house cannot perform these basic functions, then another society has to take over these tasks. Wolff defined society as "a contract which serves the purpose to reach a certain goal in a common effort. The number of people who form a society in order to reach a certain goal is also referred to as a society (societas)." 29 A house is also considered a society itself. It has the purpose to provide a living for its members. Wolff defined societies according to the goals they serve.
While he considered the houses as the basic units of decision making, he recognized that they are not self sufficient and that forms of cooperation between houses are needed to perform tasks that are beyond the capacity of the single household. In this context, Wolff introduced the concept of the state.
It is readily apparent that individual households cannot provide for themselves everything that is necessary in order to satisfy their basic needs, comfort and enjoyments, i.e. wealth. They cannot by themselves be sure to be able to enjoy the fruits of their property and to enforce their property rights. Nor can they defend themselves against aggression from outside. Therefore, one has to undertake a common social effort to achieve what individual households cannot realize on their own. And, to this end, societies have to be established. A society, which has been established to this end, is called a state (civitas). 30
Lebensnothdurft gebrauchen, und keine Anverwandten oder Freunde haben, welche sich ihrer Bedürfnisse annehmen könnten; noch ferner Krankenhäuser, worinn krancke Arme theils ernähret, theils geheilet werden; endlich Armenschulen, in welchen man die Kinder armer Eltern umsonst in demjenigen unterrichtet, was ihnen zu wissen nöthig und nützlich ist." Wolff, 1754, III, 2.3. Quoted by Jürgen Backhaus. 1989. Die Finanzierung des Wohlfahrtsstaats. Eine kleine Ortsbestimmung an Hand der Theoriegeschichte . (Financing the Welfare State). Inaugural Lecture, Maastricht, p. 6, 7. Translation, J. Backhaus, 1997, op. cit. , p. 136. 29 In the original, the quote reads as follows: "Die Gesellschaft (societas) überhaupt ist ein Vertrag mit gemeinschaftlichen Kräften eine gewisse Absicht zu erhalten. Die Menge der Menschen selbst, welche um eine gewisse Absicht zu erhalten in eine Gesellschaft treten, pflegt auch eine Gesellschaft (societas) genannt zu werden." Wolff, Vol. 19, Principles of Natural Law , op. cit. , Par. 836. 30 The original German quote reads as follows: "Wir erkennen sehr leicht, dass eintzele Häuser sich selbst dasjenige nicht hinreichend verschaffen können, was zur Nothdurft, Bequemlichkeit und dem Vergnügen, ja zur Glückseligkeit erfordert wird, noch auch ihre Rechte ruhig geniessen, und was sie von andern zu fordern haben, sicher erhalten, noch auch sich und das ihrige wider anderer Gewaltthätigkeit schützen können. Es ist also nötig, dasjenige durch gemeinschaftliche Kräfte zu erhalten, was eintzele Häuser vor sich nicht erhalten können. Und zu dem Ende müssen Gesellschaften errichtet werden (Par. 836). Eine Gesellschaft, die zu dem Ende gemacht wird, heisset ein Staat (civitas)." Wolff, Vol. 19, Principles of Natural Law , op. cit. , Par. 972. 66
Wolff sees providing law and order, as well as defense, as common tasks to be provided by the state. On the other hand, taking care of people is in the first place the task of the household, to which the person belongs, the "house" being a "society" in itself. In several places of his work, Wolff referred to the principle of subsidiarity, which can be summarized as follows: where a household is no longer able to function economically, common social efforts should be undertaken to perform the task. 31
For persons in need who have no "house," relatives or friends they belongs to, the measures described by Wolff are to be taken by other societies but the house. Those persons in need, who belong to a household, are bound to share in the duties of the household, and the household is responsible for the provision of nourishment, care and education. The limit of the intervention of another house, a private charity, the state, or any other social-economic entity, consists in the ability of the private households to care for their members. 32 Hence, with "societies" Wolff meant other entities in society, not necessarily the state. This corresponded to what he observed in the reality of his time. These entities and only residually the state perform what the households cannot do by themselves. Wolff was well aware of the limits of the state. The state should only support those activities of the citizens which were conducive to the common welfare.
The history of the subsidiarity principle shows that Wolff's thought had an impact, indeed. After the Protestant churches insisted on forms of self-governance against encroachments from the state, 33 half a century later, the Roman Catholic Church proposed the subsidiarity principle as a guideline for social policy with a view to fascist forms of government. 34 The interpretation of the Roman Catholic Church is more narrow in that it implies a hierarchical organization of society. The notion of lateral subsidiarity, where different, conceivably unequal bodies join in a common effort, is
31 See also Jürgen Backhaus. 1989. Die Finanzierung des Wohlfahrtsstaats. Eine kleine Ortsbestimmung an Hand der Theoriegeschichte. (Financing the Welfare State. A History of Economic Thought Approach). Inaugural Lecture, University of Limburg, 10-10-1989. pp. 5, 6. 32 Jürgen Backhaus. 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics . 4, pp. 129-146, p. 136. 33 Wolff was not the only scholar of his time who deducted the subsidiarity principle. His thinking can partly be put in line with that of Melanchthon, Althusius, and later Abraham Kuyper, who coined the term "soevereiniteit in eigen kring" when he delivered the Inaugural Address upon the occasion of the inauguration of the Free University of Amsterdam (October 20, 1880). Abraham Kuyper. 1880. "Sphere Sovereignty." Reprinted in James D. Bratt. Editor. 1998. Abraham Kuyper. A Centennial Reader . Grand Rapids, Michigan: Wm. B. Eerdmans, pp. 461-490. See p. 462. 34 In 1931, Pope Pius XI introduced the subsidiarity principle in the Encyklika Quadragesimo anno as a basic pillar to the order of society. The core of the subsidiarity principle is contained in numbers 77 to 80, reprinted in David J. O'Brien and Thomas A. Shannon. Editors. 1992. Catholic Social Thought. The Documentary Heritage. Maryknoll, New York: Orbis Books. 67
important in Wolff’s thought.
Recently, the subsidiarity principle gained new actuality when it was introduced as a guiding principle by the European Union. The following illustrations show that Wolff's thought can fruitfully be applied to contemporary health issues.
3.5 An Illustrative Application of Wolff's Thought
Wolff showed that other politico-economic units have to intervene, if issues are involved that go beyond the control of families and individuals. Beyond the control of families and individuals figure issues such as consumer safety, occupational safety, sanitation requirements, measures of hospital and school hygiene, prevention of infectious diseases, etc. If issues cannot be controlled by families or individuals, health policy (by boards of health) and legislation (occupational health, environmental health) are required for regulation and supervision. When looking at the history of single diseases such as tuberculosis, then Wolff's teachings have been followed late. For instance, only in 1905, the World Tuberculosis Congress was held in Berlin in order to eradicate the disease worldwide (compare chapter 10).
An example where consumer safety and occupational health are involved is the Australian asbestos tragedy. Medical research established asbestos as a carcinogen in the 1930s, but consumers in industrialized countries and mine workers in Australia have been most commonly exposed to this carcinogen well until the 1970s. 35 The Australian asbestos mining industry developed largely after these medical findings had been published. Politicians' and institutions' delay in reacting to available knowledge led to the suffering and death of several hundred Australians. For decades, industry and state agencies ignored existing medical knowledge. Neither did they provide laborers and consumers with information about health hazards of asbestos, nor did they enforce efforts to prevent the tragedy.
The Australian asbestos tragedy could have been prevented, if employers had been required to assume the health insurance costs of their employees. In addition, a variety of other measures could have been taken such as the provision of information to consumers and producers about the health hazards of asbestos, or the enforcement of effective safety measures. If one disconnects the decision making on asbestos use and those decisions at the micro level, which result in the adverse health effects, crises like the asbestos tragedy can occur. Following Wolff's approach, decision units would integrate costs and benefits and translate influence from, for instance the family, where the adverse effects of asbestos are clearly felt, to the firms, where those decisions are taken. The integration occurs through the viability of the family and the state proper.
Basic functions of health care are provided in the "house" as defined by Wolff. Today,
35 Ursula Backhaus. 1991. Book review: "Jock McCulloch. Asbestos: Its Human Cost. 1987." Business Library Review , Vol. 17 (2), pp. 128-130. 68
the role of the family has changed with more women being in paid employment, and increased mobility. In particular the number of elderly is on the rise which poses a threat to society under the current pay-as-you-go social security systems. (Reiner Leidl, 1998, op. cit. , p. 40.) By focusing on social security aspects, economists easily overlook the potential of the elderly for productivity. 36 They might be able to longer maintain an household and work than expected. A closer look at the problematic of aging by Posner revealed where the limits of the elderly are to work and to take care of themselves. 37 By taking their benefits into account, he arrived at the conclusion that the elderly do not pose as much of a threat to society as is usually held. They are productive longer, better health care and a better lifestyle add to healthy years in the middle of life, and they have more means on their own. Therefore, they can enjoy living in a household separate of their children, which gives them more privacy. Posner concluded that retirement age should be increased und subsidies to health care payments of the elderly should be abolished or at least reduced, as these subsidies make health care cheaper for the elderly, who consequently consume more than they otherwise would. Posner suggested a case for the subsidiarity principle. He noted that the young are not likely to fully internalize the needs of their own old age and will therefore not make enough provisions for old age. His reasoning is the following:
People experience somatic and nonsomatic changes when aging, as well as a change in perspective: young people look in the future and are filled with hope; the elderly, closer to death, look back to the past and build on their experience. This idea by Aristotle inspired Posner to develop the concept of "multiple selves" within the framework of a human capital model. As people age the change is so profound that one and the same person can be thought of as a young self and an old self, which intuitively explains why young people tend to consider a life with severe ailments in old age as undesirable, and sometimes would rather be dead than enduring such a life, but old people typically look at life from another perspective and endure many restraints, before they want to die. Multiple-selves analysis suggests that the young self might not fully internalize the welfare of his old self, an explanation why young people tend not to provide enough for old age. The consistent application of the subsidiarity principle means to encourage persons' ability for self care in old age. The state or a private agency would have to make sure that savings at a younger age will meet the requirements of the future elderly person.
When the European Union adopted the subsidiarity principle as a policy principle, it became a surprisingly modern tool for organizing complex systems for delivery of services, involving different levels and types of organizations. The principle of subsidiarity encompasses two types: horizontal and lateral subsidiarity. Horizontal subsidiarity has its roots in the cooperation among houses, as urged by Wolff, and
36 Book review by Ursula Backhaus on The Coming Health Crisis: Who Will Pay for Care for the Aged in the 21st Century? 1993. John R. Wolfe. Business Library Review , Vol. 22 (2), 1997, pp. 115-120. 37 Book review by Ursula Backhaus. 2001. Business Library Review International . "Posner, Richard A. 1995. Aging and Old Age . Chicago and London: The University of Chicago Press." Vol. 24, Nr. 3, pp. 215-225. 69
refers to the cooperation of different households and different branches of government at the same level. When different levels of government, both nationally and super nationally, have to cooperate this is referred to as lateral subsidiarity. Both types, the lateral and horizontal application of the subsidiarity principle, are important to the European Union. 38
The principle of subsidiarity was introduced to European health policy by the Maastricht Treaty of 1991. Article 129 deals with subsidiarity with respect to health care and is interpreted as "defining public-health issues as a matter of concern at the Community level to the extent they cannot be dealt with appropriately at the national level." 39 The recent experience with the subsidiarity principle in the European Union, in particular the examples of cross-border care between European Union member states, shows that cooperation among the different countries has to be improved. Application of the subsidiarity principle suffers from inefficiencies resulting from bureaucratic hassles and high transaction costs due to country borders that make cross-border health care difficult. 40
New methods of coordination and cooperation such as the proposal by Frey and Eichenberger can reduce these inefficiencies. 41 Political entities in federations are typically territorial jurisdictions just as country borders, counties, cantons, districts and the like. These boundaries stand in the way to fulfill a political goal. For those tasks which transcend territorial boundaries or may not even be related to them it has been proposed to introduce political units, which are delineated according to the task to be fulfilled. These are functional, overlapping and competing jurisdictions (Foqui) that can lower costs by making different systems compatible to each other. This leads to a higher efficiency of the Foqui as compared to the single and incompatible political entity one had before.
An example where a Foqui could be set up is the so-called "Euregio" formed by the
38 Harmonization efforts in the European Union are not extended to the social security systems of different member countries, but there are some exceptions with respect to health, for instance in the field of occupational health, environmental issues, and the harmonization of markets for goods and services, which may affect pharmaceutical products. Due to the complexity involved, we will exclude harmonization efforts from consideration. Compare Reiner Leidl. 1998. "Introduction," pp. 1-10, p. 1. Reiner Leidl. Editor. Health Care and its Financing in the Single European Market . Amsterdam: IOS Press. 39 Reiner Leidl. 1998. "European Integration, Economic Growth, and Health Care Expenditure." Reiner Leidl. Editor. Health Care and its Financing in the Single European Market . Amsterdam: IOS Press, pp. 38 - 58, p. 39. 40 Compare the case studies in the volume edited by Reiner Leidl, 1998, op. cit ., part IV., "Cross-Border Care between European Union Member States," pp. 285 -343. 41 Bruno S. Frey and Reiner Eichenberger. 1999. The New Democratic Federalism for Europe. Functional, Overlapping and Competing Jurisdictions . Eward Elgar: Cheltenham UK. 70
Dutch province of Limburg, the Belgium part of Limburg, and adjacent parts of Nordrhein-Westfalia. Cost-Containment measures in the Dutch health care system have led to waiting lines for treatment of particular illnesses, such as heart disease, some orthopedic procedures, or eye surgery. Dutch patients already can go over the border and face a much shorter or no waiting list for the same procedure. In the Dutch province of Limburg this happens quite frequently. Agreements have been reached with health insurers to reimburse Dutch patients from Limburg, if they receive treatment in the "Euregio." Additional agreements with health care providers in the neighboring countries have been made as well. There are certain projects, where the three countries work together. Yet, cooperation and coordination could still be improved. By establishing a Foqui in health care in the "Euregio" gains are to be expected for all sides participating. 42
The introduction of the subsidiarity principle with respect to health policy of European member countries shows that better coordination and cooperation is required. This could be achieved by establishing FOQUIs,' leading towards more efficiency in providing health care. The discussion, however, goes far beyond practical issues. The role of individual member states is changing as they move towards a post national state. 43 In the light of globalization on the one hand, and an increasing fragmentation of compound states on the other such as the dissolution of the former Soviet Union, the peaceful divorce of the former Czechoslovakia, and the devolution in the United Kingdom and in Spain, is the future of the nation-state unclear. 44 It is even possible that citizens define themselves through functions instead of birth or ethnicity. 45 In this sense, the principle of subsidiarity would apply again in terms of differentiating the different functions the state has to perform from the point of view of a citizen
42 Coordination within the Foqui and among the different Foquis' can be achieved by voting. In the health care industry it is difficult to arrive at decisions due to the presence of bureaucratic committees, power structures in hospitals, the influence of special interest groups, political regulations and verbal agreements between parties, short- and long-run contracts with health insurers, etc. Cutting through all this is a voting mechanism such as the demand-revealing process which takes the intensity of preferences into account. This voting mechanism could be used to achieve simplicity of decision-making within and among Foquis.' At the same time, it would cut through bureaucratic hassles and allow for a more democratic decision making in the European Union. Ursula Backhaus. 1995: "Cutting through the Red Tape and Restoring Paracelsus' Simplicity: A Simple, New and Superior Process for Taking Collective Decisions in Health Care." International Review of Comparative Public Policy , Vol. 6, pp. 347-358. 43 Inaugural lecture by Arno Scherzberg, University of Erfurt, 7-9-2002. 44 Compare the contributions in Jürgen G. Backhaus. Guest Editor. 1999. Freedom, Trade, and the Nation-State . Journal of Economic Studies . Vol. 26, No. 4/5. 45 Bruno S. Frey. 2002. "Liliput oder Leviathan? Der Staat in der globalisierten Wirtschaft." (The State in the Globalized Economy). Perspektiven der Wirtschaftspolitik . Vol. 3, Nr. 4. 71
simultaneously belonging to different functional states, or Functional Overlapping Competing Jurisdictions , as Bruno Frey calls them.
2.6 Summary and Conclusions
Wolff developed socio-economic views of a well functioning economy, giving economics its place within the general system of natural law (jus gentium). The goal of the economy is happiness of the people. In order to reach happiness, men are bound to fulfil their duties with respect to God, themselves, and others. This includes caring for one's own health and that of others, sharing knowledge, providing education to children, or helping each other in case of need.
In his outline of natural law, Wolff defined basic principles which are relevant to health economics. The "house" - conceived as an integrated production and consumption household - is in his conception the smallest unit of decision-making. The house provides among other things health care for its members, when they are unable to care for themselves. Wolff was careful in describing under which circumstances other socio- political units might take over tasks from smaller units. The "house" is the relevant unit of decision making, but Wolff saw a role of the state or any other "society" in the coordination and cooperation of the houses. In this context, he developed the subsidiarity principle. The limits of the intervention of a "society" consist in the ability of the private households to care for their members. Considering the time he wrote, Wolff saw a major role for charities and other socio-political units in health care, and only residually one for the state. Wolff stood for a benign state. The task of the state was to provide services which could not be organized at a lower level such as law and order and defense.
With respect to methodology, a bridge can be built from Paracelsus to Wolff, who more than a century earlier tried to put medicine on an empirical footing. In maintaining that medicine was not only an art, but also a science, Wolff demanded that scholarly methods should be applied to the field in order to increase medical knowledge. He held that only on a better scientific basis, one could arrive at better medical care.
The emphasis in this chapter is on the original contents of Wolff's work, but in order to show its relevance, three applications have been chosen. First, with respect to consumer and occupational safety, there is a role for the state or another agency, if consumers or workers cannot adequately protect themselves. Second, combining the notion of subsidiarity and Posner's work on aging leads to the conclusion that the present policy, which treats the elderly as being dependent from the state, should be reformed to a policy, which encourages and supports self care over people's entire life cycle. Third, in the Maastricht Treaty of 1991, the subsidiarity principle was introduced with respect to health care. Examples of cross-border care show that a better coordination and cooperation is required among European countries in order to make application of the subsidiarity principle more efficient. However, if the vision of a decline of the nation-states holds true, where the future citizens will define themselves rather 72
through functions instead of birth or ethnicity, then problems of coordination and cooperation would be different. In this sense, the principle of subsidiarity would apply again in terms of differentiating the distinct functions the state has to perform from the point of view of a citizen simultaneously belonging to different functional states, or, as Bruno Frey calls them, Functional Overlapping Competing Jurisdictions .
Invoking the principle of subsidiarity, the early writers assigned the state an important role with respect to regulation and supervision. The theoretical basis for these measures starts with Wolff and Paracelsus. The collective area requires health policy. The main example is the development and implementation of health insurance as shown by Schmoller (compare chapter eight). A different aspect was pronounced by the Cameralists (compare chapter four): the welfare of an economy can be increased by a better health state of the people. This means that the tax base can be broadened and consequently that the state income can be increased through public health policy.
References
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Backhaus, Jürgen. Guest Editor. 1999. Freedom, Trade, and the Nation-State . Journal of Economic Studies . Vol. 26, No. 4/5.
Backhaus, Jürgen and Stephen, Frank H., Editors. 1997. European Journal of Law and Economics . Kluwer. 4.
Backhaus, Jürgen. 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics . Kluwer. 4, pp. 129-146.
Backhaus, Ursula. 1991. Book review: "Jock McCulloch. Asbestos: Its Human Cost. 1987." Business Library Review , Vol. 17 (2), pp. 128-130.
Backhaus, Ursula. 1995. "Bibliography of the Economic Works of Christian Freiherr von Wolff." Prolegomena to the Seventh Heilbronn Symposium on Economics and the Social Sciences. "Christian Freiherr von Wolff (1679-1754)." June 22-25, 1995. Discussion paper No. Wp/95/004, University of Limburg , pp. 7-43.
Backhaus, Ursula. 1997. Book Review: "John R. Wolfe. 1993. The Coming Health Crisis: Who Will Pay for Care for the Aged in the 21st Century? " Business Library Review , Vol. 22 (2), pp. 115-120.
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Frey, Bruno S. 2002. "Liliput oder Leviathan? Der Staat in der globalisierten Wirtschaft." (The State in the Globalized Economy). Perspektiven der Wirtschaftspolitik . Vol. 3, Nr. 4.
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Friedman, Milton. 1953. "The Methodology of Positive Economics." In: Essays in Positive Economics . Chicago: University of Chicago Press, pp. 3-43.
Kanamori, Shigenari. 1997. "Christian Wolff's Speech on Concucianism-Confucious as Compared with Wolff. European Journal of Law and Economics . Kluwer. 4, pp. 299- 304.
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Pribram, Karl. 1983. A History of Economic Reasoning. Baltimore and London: The Johns Hopkins University Press.
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Scherzberg, Arno. 7-9-2002. Inaugural Lecture, University of Erfurt.
Schöpsdau, Walter. "Sozialenzykliken." (Social Encyclika). Evangelisches Kirchenlexikon , Editors: Erwin Fahlbusch et. al. Göttingen: Vandenhoek & Ruprecht, pp. 323-325.
Schmoller, Gustav. 1923 (2). Grundriß der allgemeinen Volkswirtschaftslehre I . Munich/Leipzig: Duncker & Humblot.
Senn, Peter R. 1997. "What is the Place of Christian Wolff in the History of the Social Sciences?" European Journal of Law and Economics . 4, pp. 147-232.
Wolff, Christian. 1754 Halle. 1980 Reprint. Grundsätze des Natur- und Völkerrechts . (Principles of Natural Law and the Law of Nations). Collected Works, 1. Division, German Writings, Vol. 19. Marcel Thomann. Editor. Hildesheim, New York: Olms.
Wolff, Christian. 1736-1770 Halle. 1981 Reprint. Gesammelte Werke. Kleine Philosophische Schriften . (Collected Works). I. Division, German Writings, Volumes 21.1, 21.2, 21.3, 21.5. Jean Ecole. Editor. Hildesheim, New York: Olms.
Wolff, Christian. 1755 Halle. 1983 Reprint. Gesammelte Werke. Kleine Schriften . (Collected Works). I. Division, German Writings, Vol. 22. Jean Ecole. Editor. Hildesheim, New York: Olms.
Wuttke, Heinrich. Editor. 1841. Christian Wolffs eigene Lebensbeschreibung . (Christian Wolffs own Biography). Edited with a Treatise on Wolff. Leipzig: Weidmann'sche Buchhandlung.
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Chapter 4
Johann Heinrich Gottlob von Justi (1717 - 1771):
Health as Part of a State's Capital Endowment
Contents
4.1 Introduction
- The Impact of the Thirty Years' War - Distinctive Feature of Cameralism: the Concern with the Police Function - Health Related Thought in Cameralism
4.2 People, the Wealth of the State
- Major Population-Based Measures
4.3 Justi's Contributions to the Economics of Health
- Justi's Notion of Social Welfare - How to Prevent Starvation - How to Abolish Begging - The Human Toll of Winter Campaigns - Health Measures Against the Depopulation of a Country - Public Health Tradition in Cameralism
4.4 Relevance of Justi's Thought
4.5 Summary and Conclusions
This chapter has been prepared for presentation at the 14th Heilbronn Symposion in Economics and the Social Sciences devoted to Johann Heinrich Gottlob von Justi (1717 - 1771), June 22-24, 2001. "Johann Heinrich Gottlob von Justi (1717 - 1771): Health as Part of a State's Capital Endowment." Publication forthcoming in: The European Heritage in Economics and the Social Sciences , Volume VI. Backhaus Jürgen and Frank Stephen. Editors. New York: Springer. 77
4.1 Introduction
In this chapter, the contributions of the Cameralists are investigated, in particular those of Justi (1717 - 1771), to the understanding of what later was to become health economics. After the disastrous events of the Thirty Years' War (1618 - 1648) human capital mattered. Hence, Cameralism emerged as a science of economic policy which was directed towards economic development. It was not incompatible with intellectual developments elsewhere, notably in France, but yet totally different in its emphasis on economic development and the human factor in production. The most prolific writer of the Cameralists, who fully developed the science, was Johann Heinrich Gottlob von Justi. 1 To him not only the quantity, but also the quality of the population mattered. Since health has an influence on both, he elaborated policy measures that would improve the health of the population in order to make economic development possible and to sustain further growth. Justi proposed incentives that would stimulate agriculture and thus encourage an improvement of the nourishment of the population in order to enhance health; he came forward with ideas how to raise the quality of health care and proposed the introduction of a supervisory board for health care provision; and he was concerned with the health of soldiers. As was common in Cameralism, Justi considered people the wealth of the nation. Health is therefore a matter of investment, not consumption; the healthier the population, the higher the wealth of the population.
Cameralism emerged in the middle of the sixteenth century, developed mainly during the time of the Thirty Years' War (1618 - 1648), and ended in the late eighteenth century. Cameralism was a scientific development of its own kind; "nowhere the doctrine of the state, as well as administrative science was connected to the social economy in the same way as in the German territorial states." 2 The Cameralists wanted to increase and improve the population as a basis for economic development. They recognized a higher level of education and better health as factors that advance development of a nation.
Cameralists were neither monolithic writers, nor did they form a school of Cameralistic thought, but had a common orientation as writers "... who approached civic problems from a common viewpoint, who proposed the same central question, and who developed a coherent civic theory, corresponding with the German system of
1 Lippert. 1900 (2). "Justi, Johann Heinrich Gottlob von." Handwörterbuch der Staatswissenschaften . (Encyclopedia of the State Sciences). Vol. 4. Jena: Gustav Fischer, pp. 1419-1420. 2 The original quote (with the emphasis in the original) reads as follows: "Der Kameralismus ist eine Eigenart der deutschen Sozialwirtschaftslehre, die kein Seitenstück in einem anderen Lande hat. Dies deshalb, weil nirgendwo die Staats- und Verwaltungslehre mit der Lehre der Sozialwirtschaft derart verbunden war wie in den deutschen Territorialstaaten." Anton Tautscher. 1956. "Kameralismus." (Cameralism). Handwörterbuch der Sozialwissenschaften. (Encyclopedia of the Social Sciences). Vol. V. Fischer: Stuttgart, Mohr: Tübingen, Vandenhoeck & Ruprecht: Göttingen, pp. 463-467, p. 464. 78
administration at the same time in course of evolution." 3 Cameralism received its main impetus from the Thirty Years' War (1618 - 1648) which had been a period of dramatic population decline, destruction of the agricultural base, and devastation of other capital.
The Impact of the Thirty Years' War
The Thirty Years' War (1618 - 1648) and its aftermath gave Cameralism its particular character. The environment under which the Cameralists, as advisors to the feudal princes, had to function was characterized by competition between the many German states, a weak central power, and a war-torn country with a destroyed economic basis and an overall population that had fallen by roughly one-third, from about 21 million to around 13 million. 4 In this situation, the Cameralists turned their attention to the development of human capital, as they believed that this would foster economic development.
More than three hundred small and independent sovereign states were created in the peace negotiations of the Thirty Years' War that started in Hamburg in 1641 and ended in the Westphalian cities of Münster and Osnabrück in 1648. Each state had only limited power, and the states had little unity among themselves. The rulers of the individual states could act independently. The central power, consisting of the Emperor and the Imperial Diet (Reichstag), was weakened. Central taxation was almost impossible due to war-related damages and the destroyed economy. 5 The Emperor could not act by himself in foreign policy. Each individual ruler had the free right to form an alliance with a foreign country, as long as it was not directed against the Emperor or the Empire. The subjects of a territory had to follow the religion of the ruler of a territory, but they had the right to emigrate if they wished to. The many independent and small states competed with each other for skilled labor and capital.
3 This is the definition by Albion W. Small, the founder of American sociology, who investigated social theory in the works of the Cameralists. He traced the Cameralists' social theory back to their concern to furnish the state with ready means. Albion W. Small. 1909. The Cameralists: The Pioneers of German Social Polity. Burt Franklin: Chicago, p. viii. 4 The reduction in population was not evenly distributed. "The population of Württemberg fell from 400,000 to 50,000. The Palatinate lost more than 90 percent of its population. Three million people in Bohemia were reduced to 800,000." Jürgen Backhaus and Richard E. Wagner, 1987, "The Cameralists: A Public Choice Perspective." Public Choice . 53, p. 4. The contributions to the Heilbronn Symposion on the Thirty-Years War have shown that at the time of the Thirty Years' War, the statistical basis was not set up in well-defined units. For instance, one could not distinguish between the causes of death such as natural death or death caused by war and epidemics. 5 Compare Brockhaus Encyclopedia, 1892. Brockhaus' Konversations=Lexikon. "Westfälischer Friede." (Peace of Westphalia). F. A. Brockhaus: Leipzig, Berlin, Vienna, pp. 665-666. 79
Distinctive Feature of Cameralism: the Concern with the Police Function
The Cameralists, in serving as economic advisors to the princes and feudal rulers of the territories, grounded their advice on economic arguments. 6 It was in the interest of the individual rulers to create conditions that attracted people to live in their territory. By developing an infrastructure that formed the basis for economic development, Cameralists tried to create a tax base for the state. The Cameralists were not only concerned with the treasury function, but also with the police functions of the state. Police functions in Cameralism are broader than in the English understanding of the word. 7 They encompass such measures as public education, public health policy, environmental policy, and even the regulation of the manufactures through the guild system ( Polizeigewerbe ). (Pribram, op. cit. , p. 96). Cameralists systematically proposed the use of the police function as the most appropriate way to establish a basis for national wealth, which would lead to further economic growth. Justi had a clear view of the importance of human capital as he wrote "...all skills of the people living in the state, and even the people themselves are part of the wealth of the state." 8 Thus, human capital and its development form the major basis of economic development. Cameralists designed and applied the police functions to foster economic development on the basis of human capital.
The concern with the police functions distinguishes Cameralists from Mercantilists and Physiocrats. Prominent figures in the history of economic thought literature did not always see this clearly; for instance, the views of Adam Smith and Heinrich Rau contributed to misconceptions around Cameralism. Adam Smith did not distinguish between Mercantilists and Cameralists. 9 Therefore, his criticism of the Mercantilists as pure collectors of money has been applied to the Cameralists as well. Adam Smith disliked the Cameralists' policies, and in particular their projects of entrepreneurial activities leading to non tax-revenues of the states (werbende Staatseinnahmen)."
6 Jürgen Backhaus and Richard E. Wagner. 1987. "The cameralists: A public choice perspective." Public Choice. 53, pp. 3-20, p. 6. 7 Therefore, a better translation might be policing function or simply policy or policy making, but policy and policy making are too arbitrary. Policing would presume a set framework of objectives which had to be developed first. 8 Louise Sommer. 1920-25 (1), 1967 (2), op. cit. , p. 233. The statement by Justi (1758) reads in the original as follows: "... alle Fähigkeiten der Menschen, ja, diese Menschen selbst, gehören zum Vermögen des Staats." Staatswirthschaft oder Systematische Abhandlung aller ökonomischen und Cameralwissenschaften. (The State Economy or Systematic Treatment of all Economic and Cameralist Sciences). Leipzig: Breitkopf. Vol. I, p. 160. 9 Compare Jürgen Backhaus. 1994. "The German Economic Tradition: from Cameralism to the Verein für Sozialpolitik." In: Eds. Manuela Albertone and Alberto Masoero. Political Economy and National Realities. Torino: Fondazione Luigi Einaudi, pp. 329-356, p. 344. 80
The critics were also responsible for a misconception between the Cameralists and the Physiocrats. 10 Rau stated that the Cameralists had the same goal as physiocrats, namely the maximization of the budget of the feudal rulers. He described the Cameralists as advisors mainly concerned with the treasury ("Schatzkammer") and gave thereby the term "Cameralism" too narrow a meaning. Rau neglected that "Cameralism" not only meant that the Cameralists were acting in the interest of the treasury, but that they also had access to a government ("Ratskammer") as advisors of the princes or feudal rulers. 11 Rau concluded that the Cameralists were mainly interested in the treasury function and that they only added to the treasury the functions of police later in order to provide security, education and certain minimum hygienic standards for food. He stated that the police functions of health, formal schooling and basic hygiene were not connected to the study of the treasury. (Rau, op. cit. , p. 12). According to Rau, only the Cameralists' political advice on the treasury was inspired by the question how to increase the national wealth, but not so their concern with the police functions.
Rau's interpretation of Cameralism is too narrow. In Cameralism, the police functions surely were part and parcel of a policy to increase national wealth and ensure further economic growth. Justi wanted to raise only so much money as is necessary for the state to fulfil its functions. Such a tax policy including entrepreneurial projects by the state would fit in a broader policy orientation with the aim to maximize the welfare of the citizens in order to create a basis for economic development and a tax base for the state.
The Cameralists' insights go beyond a narrow concern with the treasury. They had access to policy makers and while they studied ways to increase the revenues of the treasury, this was not unconnected to the study of the police functions. Cameralists went beyond the narrow concern of administration of the budget and studied the conditions that make for greater economic success in order to broaden the tax base. The emphasis of their work lies on proposals for measures for how to increase the state income. They developed theoretical principles of economics and can be considered the forefathers of public economics. Cameralism included the study of many fields, for instance agriculture, forestry, mining and factory problems. Cameralists realized that the economic well-being of a country depends on the health of the citizen,
10 D. Karl Heinrich Rau. 1823. Ueber die Kameralwissenschaft. Entwicklung und Wesen ihrer Teile. (On Cameralism. Development and Character of its Elements). Heidelberg: Universitäts=Buchhandlung von E. F. Winter. 11 Johann Heinrich Gottlob von Justi. 1758. Staatswirthschaft oder Systematische Abhandlung aller ökonomischen und Cameralwissenschaften. Leipzig: Breitkopf. I, Paragraph 3. Justi's explanation of the name "Cameralism" is quoted and put in context to the Cameralists' approach of a science of public finance by Jürgen Backhaus, 1989, in Die Finanzierung des Wohlfahrtsstaats. Eine kleine Ortsbestimmung an Hand der Theoriegeschichte. (Financing the Welfare State. An Orientation by a History of Economic Thought Approach). Inaugural Lecture, p. 8. 81
and they developed and realized measures of public health. They were also concerned with citizens' schooling. The Cameralists' concern with the police functions led to an increase in the human capital formation. In their view this would lead to a rise in national wealth and consequently to a broader tax base.
Wicksell recognized the particular strength of the Cameralistic approach. In comparing physiocracy to Cameralism he noted the following:
In a word, free exchange in economics may be compared to the method of `trusting to nature' in medicine - when the doctor really does nothing, but leaves nature to effect its own cure. The term `physiocracy' means precisely this. In a state of perfect health, which corresponds to a system of economic equality, this is certainly the only correct treatment. Even in ill health, it certainly has a great advantage over bad treatment and dubious medicines. On the other hand, it cannot compare with a truly scientific treatment, which assists nature in a reasonable manner. Moreover, in the last resort, the effects of even the most brilliant cure cannot be compared with those of rational hygiene, which aims at preventing disease and preserving health. 12
The latter cure described by Wicksell refers to Cameralism. 13 Indicators of economic growth and population growth suggest that the states applying the Cameralists' prescriptions performed well, indeed. When compared to France and other mercantilist states under the influence of the Physiocrats, economic growth and prosperity was much higher in the states advised by Cameralists than in those states, which followed Physiocratic thought. 14 Policies directed towards investment take a long time before they show results. Roscher (1817-1894) took the emphasis of health issues from the Cameralists and gave social policy advice in line with Cameralist thought (compare chapter four). Therefore, it is legitimate to interpret the later demographic development as a success of the Cameralists. For instance, the average annual increase in population in the time period between 1860 and 1895 in Germany was 0,93%, and in France 0,29%, roughly a third of the former growth rate.
12 Knut Wicksell. 1969(2), 1893 (Jena). Über Wert, Kapital und Rente nach den neueren nationalökonomischen Theorien . (On Value, Capital, and Rent). Aalen: Scientia, p. 82. Justi preceded the Physiocrats. He also pursued the idea of the single tax, which later became the main feature of the Physiocrats. 13 Wicksell recognized the implications of the Cameralist period. He tried to implement a similar institutional-constitutional order in Sweden, which would take the profit-seeking motive of legislators and bureaucrats into account and reward public officials according to their success in achieving the aggregate well-being of the members of the state. Compare Backhaus and Wagner, 1987, op. cit. , p. 18. 14 Compare Richard Wagner on Cameralism, Maastricht Lectures in the History of Economic Thought, 10-11-99, publication forthcoming: 2000. "Cameralism." In: Jürgen Backhaus. Editor. Pioneers of Modern Economics. Maastricht Lectures in the Political Economy . Cheltenham: Edward Elgar. 82
Health Related Thought in Cameralism
Predecessors and precursors to Cameralism discussed health in connection to poverty and thought of ways of how to relieve poverty. 15 Two early representatives are Melchior von Osse (1506/7 - 1557) and Georg Obrecht (1547 - 1612). Von Osse was opposed to all kinds of tributes to the state and especially to taxes, when they were not collected with the purpose of being spent on measures of relief in extraordinary cases. He argued that through regularly and permanently levied taxes those families would fall destitute, which needed all the means available for self-support. Due to his Christian duty, the Duke should provide help to the destitute. Van Osse proposed that the state should acquire income by founding and running productive enterprises, and not by demanding tributes and levying taxes. According to Obrecht, it was in the interest of the state that people earn as much income as possible. Obrecht proposed individual insurance contracts and savings accounts to relieve poverty and the devastating effects of illness. Parents, who had been poor at the time, when their children were born, but who were later able to support themselves due to a higher income or because of inheritances made, should create savings in order to be able to provide for their children. Those people, who not only have enough means to provide for food and housing, but who have some money left, should invest in insurance funds in order to be able to support themselves in sickness or old age. 16
Early Cameralists such as Johann Joachim Becher (1635 - 1682), Philipp Wilhelm von Hörnigk (1640 - 1714), and Wilhelm von Schröder (1640 - 1699) made calculations on the value of the people and concluded that a numerous and healthy population was a source of wealth to the country. The focus of Johann Georg Leib's (1670-1727) work was on qualitative development, on "how a ruler can improve land and people, foster industry and raise the nutritional standard." 17 Veit Ludwig von Seckendorf (1626 - 1692), another Cameralist of that period, was in favor of population growth. 18 The measures he proposed were development of agriculture and small industry, prohibition of exports, and abolition of usury and monopolies. While he was opposed to taxes in
15 Louise Sommer. (1920-25) (1), 1967 (2). Die österreichischen Kameralisten in dogmengeschichtlicher Darstellung. (An Analysis of the Austrian Cameralists in the History of Economic Thought). Aalen. Scientia Verlag. 16 Wilhelm Roscher, "Kinderversorgungskasse mit fiskalischem Nebenzweck," (Children's Savings Account with an Additional Fiscal Purpose). 1874. Geschichte der National-Oekonomik in Deutschland . (History of Economics in Germany). Munich, p. 153. 17 This is the title of Johann Georg Leib's (1670-1727) main work, in the original: Vier Proben, wie ein Regent Land und Leute verbessern, des Landes Gewerbe und Nahrung heben könne . Frankfurt und Leipzig. 1708. Compare Anton Tautscher. 1956, op. cit ., p. 466. 18 Josef Stammhammer. 1901 (2). "Seckendorf, Veit Ludwig von." Handwörterbuch der Staatswissenschaften . (Encyclopedia of the State Sciences). Vol. 6. Jena: Gustav Fischer, pp. 665. 83
general, von Seckendorff preferred the excise tax, but only if needed. 19 Under the excise tax, the poor would have to pay relatively more than the rich did. This had to be accepted, since it would enable the rich to keep their means and use their accumulated funds to provide employment. In this way, by providing employment opportunities through trade and agriculture the rich would support the poor more than under any other tax scheme. He supported a tax system which discourages consumption and encourages investment. If a household was unable to achieve the subsistence level, he distinguished between poor, but able people, and those who are both, poor and unable at the same time. Only the latter category includes the sick and unable elderly and therefore deserves to be supported. (Peter, op. cit. , p. 34 - 36).
Von Seckendorf developed a new view on the state, which he understood as a moral undertaking. 20 At the time, it was popular to believe that for the politician only the interest of the state was important without consideration of moral and legal restraints. This view he rejected as a misunderstanding of Machiavelli. His main works, German State of Feudal Rulers ( Teutscher Fürstenstat , Frankfurt a. M., 1656) and German Christian State ( Teutscher Christen-Staat , Jena 1685) received several revised editions. After having served as custodian of the ducal library of Gotha, he became Councillor at the Court (Hof- und Justitienrat) around 1652, in 1656 he became Privy Councillor (Geheimer Hof- und Kammerrat), and in 1664 Chancellor of the newly founded University of Halle (Prussia). Cameralism became a field to be taught at universities in the beginning of the 18th century. The first university with a chair in Cameralism was founded in Halle in 1723. Frankfurt a. O. followed in 1727. Before that time, Cameralism was embedded in the teachings of law. Later, notably after 1727, Cameralism developed into political economics.
In the eighteenth century, refined cameralism achieved its perfection in the writings of Johann Heinrich Gottlob von Justi and Joseph von Sonnenfels (1732-1817). The focus in this chapter will be on the writings by von Justi who stated the principles of "Polizeiwissenschaft" (police science, public administration) in 1756 and wrote many textbooks thereafter. 21 As will be shown later, von Justi applied his general system rather specifically to health economic issues.
Von Justi was born (around) 1717 in Brücken (Prussia). He went to law school and
19 Joachim Heinrich Peter. 1934. Die Probleme der Armut in den Lehren der Kameralisten . (Problems of Poverty in the Teachings of Cameralists). Berlin: Emil Ebering, p. 33. 20 Adolph Wagner. 1901 (2). "Der Staat." (The State). Handwörterbuch der Staatswissenschaften . (Encyclopedia of the State Sciences). Vol. 6. Jena: Gustav Fischer, pp. 907-951, p. 908. 21 Johann Heinrich Gottlob von Justi. 1969. [Reprint ot the third improved edition with comments, Johann Beckmann (ed.) 1782, (3). Göttingen: Vandenhoek. 1756 (1), 1759 (2)]. Grundsätze der Policeywissenschaft. (Principles of "Policeywissenschaft"). Frankfurt a. M.: Sauer & Auvermann KG. Including reprint of "Preface to the first edition" and "Introduction" by Johann Beckmann. 84
studied Cameralism in Wittenberg. 22 After escaping from Austrian captivity, he fled to Leipzig and studied metallurgy, but returned to Vienna in 1750 as a professor of Cameralistic and German Rhetorik (deutsche Beredsamkeit) at the newly established Theresianum in Vienna, an academy for the education of the nobility. In 1755, he went to Göttingen as a Mining Council ("Bergrat") to teach economics and natural science. In 1762, Friedrich II of Prussia asked him to come to Berlin as the chief supervisor (Oberaufseher) of the fiscal mines of Prussia. When he was accused of sloppy bookkeeping and possibly embezzlement of money - a charge that has never been proved; the problems could have resulted from his bad eyesight - he was imprisoned in the fortress of Küstrin, where he died in 1771.
Von Sonnenfels, who also served the imperial Austrian court as advisor on questions of public administration and economic policy, occupied the chair of police and cameral sciences founded in 1763 at the Theresianum in Vienna. 23 In his textbook, "Principles of Public Administration, Policy and Finance," ( Grundsätze der Polizey, Handlung und Finanz ), published in 1765, he dealt with matters of public health such as care of the sick, poor relief, prevention of epidemics, regulation of medical practice, or methods of procuring abortions. The physician and Cameralist Johann Peter Frank (1745-1821) was deeply influenced by his work. 24 Frank, a German physician, was appointed the director of the General Hospital at Vienna (1795-1804), before he became the physician to Czar Alexander I. In 1808, he returned to Vienna. His "System of a Complete Public Health Administration" strongly influenced the development of medical practice in Austria and Russia. 25
Other Cameralists could be mentioned, but this introduction serves the purpose at hand, to show that economic ideas about health and public health policy have evolved in Cameralism. In what follows, we shall first take a look at their common idea, the view of people as the wealth of the state.
22 Lippert. 1900 (2). "Justi, Johann Heinrich Gottlob von." Handwörterbuch der Staatswissenschaften . Vol. 4. Jena: Gustav Fischer, pp. 1419-1420. 23 Karl Pribram. 1923. A History of Economic Reasoning. Baltimore: The Johns Hopkins University Press, p. 95. 24 Erna Lesky. 1976. Editor and Introduction to Translated Selections from Johann Peter Frank. Johann Peter Frank. A System of Complete Medical Police . Baltimore, Maryland: The Johns Hopkins University Press. 25 Frank is the author of System einer vollständigen medizinischen Polizei . (6 volumes, 1779-1819; supplement 3 volumes, 1812-27; translated into Italian, 1808-30). Josef Stralau. 1965. "Gesundheitspolitik." (Health Policy). Handwörterbuch der Sozialwissenschaften . (Encyclopedia of the Social Sciences). Stuttgart: Gustav Fischer. Tübingen: Mohr (Siebeck). Göttingen: Vandenhoeck & Ruprecht. Vol. 4, pp. 454-459, p. 455. Frank's work needs to be relegated to a separate, more specialized study. 85
4.2 People, the Wealth of the State
Major Population-based Measures
Cameralists developed an entire range of economic-political measures by designing institutions that could be influenced by the state, by law, or by the will of the princes who governed the German states. The initiative for designing such institutions could hence come from either the estates, or the various forms of state administrative bodies, or the chambers of the prince himself. The Cameralists, i.e. the advisors in the chambers of the prince, derived their legitimacy from their university-based erudition coupled with their track record in administrative practice. To give an example: von Justi had a dual appointment as professor and councillor of mining affairs in Vienna.
The measures Cameralists proposed with respect to preserving and enhancing the health of the population were only a small set of all economic-political measures they advocated and directed towards improving and increasing the population. The following are the major, population-based measures: 26
- Improvement of the health of the population; - Improvement of the knowledge of the population, for instance of methods of production; - Strengthening of social norms; - Educating children; - In particular, children should be taught how to work in order to prepare them for the production process later on; - Weak persons should participate in the production process; - An increase in the number of children born; - Attracting new inhabitants to the country; - Incentives for the inhabitants of the country to stay there; - Humane penalties for criminal acts; 27 - Prevention of war; - In case of war, the negative effects of war had to be minimized.
Other economic policies, for instance agricultural policies to make food readily available or measures involving infrastructure, were also connected to the population policies and had repercussive effects; they were expected to support population growth. Schmoller criticized the Cameralists' approach, mainly for its neglect of individual
26 Louise Sommer discussed these measures under the heading of "Populationistik." Compare 1967 (2). Die österreichischen Kameralisten in dogmengeschichtlicher Darstellung. (Austrian Cameralists, an Analysis in the History of Economic Thought). Aalen: Scientia Verlag, p. 233-248. 27 A hardliner among the Cameralists was Jung. He believed that execution would be the appropriate sentence in case of murder because of its deterrent effect. Johann Heinrich Jung. 1788. Lehrbuch der Staats-Polizey-Wissenschaft . Leipzig: Weidmann. Reprint 1970, Keip. "Persönliche Sicherheit." (Personal Security), pp. 46-72. 86
initiatives and a lack of consideration of markets (see chapter seven). 28 While other policies were important, the Cameralists' concern with the population remained the common denominator, a fact that can best be understood in the context of the Thirty Years' War.
4.3 Justi's Contributions to the Economics of Health
Justi's Notion of Social Welfare
Justi's notion of social welfare is that of the happiness (Glückseligkeit) of the state. He does not refer to individual happiness as is common today. Instead, his notion of happiness of the state resembles a concept of social welfare. The happiness of the state or social welfare increases with the number of healthy people living in the state. In turn, the number of people being ill, very old, or those living in extreme poverty reduces the social welfare. Not only good health contributes to the happiness of the state; other essential elements are that people's basic needs are covered and that they can lead comfortable lives. 29 Justi devised social policies directed towards increasing the happiness of the state. It is here that we find the roots of modern state health policy.
Justi developed basic principles of economic organization and applied them to the design of appropriate institutions. For instance, (1) he proposed measures of control in order to improve the quality of health care. Effective medical technology is a precondition for a modern health care system. 30 (2) In order to reduce the risk of starvation, he took measures to build up the wealth of the population in particular within the household. 31 (3) He tried to reduce the risk of death, for instance by discouraging Cameralistic princes from engaging in wars, in particular during the winter period, and he proposed hygienic measures to prevent epidemics carrying a high mortality toll. A sufficiently low risk of death is necessary to make the efforts of improving health worthwhile. (4) He designed institutions so that people could accumulate savings for personal hardships. At an early stage of the health care system, ample wealth was
28 Gustav Schmoller. 1923. Grundriß der Allgemeinen Volkswirtschaftslehre. First Part. (Blueprint, I). Munich, Leipzig: Duncker & Humbolt, p. 63. 29 Johann Beckmann. 1782. "Introduction" to the third improved edition with comments, p. 6. In: Justi, Johann Heinrich Gottlob von. 1969. [Reprint ot the third improved edition with comments, Johann Beckmann (ed.) 1782. Göttingen: Vandenhoek]. Grundsätze der Policeywissenschaft . (Principles of Police Science). Frankfurt a. M.: Sauer & Auvermann KG. 30 Thomas E. Getzen. 1997. Health Economics: Fundamentals and Flow of Funds . New York: John Wiley & Sons, p. 309. 31 Getzen stressed that in our times the "deficit that allows starvation to remain a threat to the health of people is not a shortage of knowledge, or machinery, or even of money for investment, but of economic organization." Thomas E. Getzen, 1997, op. cit ., p. 322. 87
required to pay for medical treatment in advance.
In Cameralism health is part of a state's human capital endowment. While Justi tried to indicate ways and means to prevent the starvation of people, he went beyond. He wanted to see an increase and improvement of the population. Several measures served this goal, among them cultivation of the land, industrialization, trade policy and population policies such as an active immigration policy, discouraging emigration, and light sentences for criminal behavior. Justi's ideas for improving the health of the population are still worth considering. They are in particular useful in developing countries where a modern health care system cannot be realized, because the preconditions for its development are not met or only partially fulfilled.
How to Prevent Starvation
Starvation caused by a lack of food supply endangered the health of the population. As a remedy, Justi encouraged cultivation of the land by farming. He noted that farmers need to own their land, because otherwise they would not be motivated strongly enough to undertake the hard work of cultivation and improvement of fertility of the land.
It will certainly lead to a better cultivation of the ground and to the beginning of agriculture, if the farmers are owners of the farms and do not live there as villains or as bailiffs or tenants of the farm. If the farmers are not owners themselves then they lack the most effective incentive, which people require being busy, hard working, and which makes them undertake difficult and valuable improvements. The fact is that they have to be convinced that their work is to their own benefit and to that of their children. 32
An incentive for cultivation would result from the proper tax policy and the threat that
32 Es gereichet unstreitig zu besserer Cultur des Bodens und zur Aufnahme der Landwirthschaft, wenn die Bauern selbst Eigenthümer von denen Bauergütern sind, und nicht solche als Leibeigene und als bloße Meyer und Pachter bewohnen. Wenn sie nicht Eigenthümer sind, so fehlet denen Bauern die eigentlichste und wirksamste Triebfeder, welche die Menschen zum Fleiß, Arbeitsamkeit und mühsamen oder kostbaren Verbesserungen nöthig haben, nämlich, daß sie überzeugt sind, daß sie zu ihren eigen und ihrer Kinder Nutzen arbeiten." Johann Heinich Gottlobs von Justi. 1761. Gesammlete Politische und Finanzschriften über wichtige Gegenstände der Staatskunst, der Kriegswissenschaften und des Cameral- und Finanzwesens . (A Collection of Political and Financial Writings on Important Subjects of the Art of Policy, of the Science of War, and on the Cameral and Financial System). Koppenhagen und Leipzig. Auf Kosten der Rothenschen Buchhandlung. P. 619: XII. "Von Leitung des Nahrungsstandes durch die Abgaben." (How to Direct Those Responsible for Nourishment, i. e . Agriculture, by Duties and Burdens). 88
the state could take ownership away, if the land remains uncultivated.
It is common in various countries to allow a relief of duties or even release the burdens entirely if pieces of land are used less than before or even if they lay bare. I consider this a rule, which is not at all in agreement with the welfare of the state. Every single piece of land which is used less due to the negligence of its owner, and which might even remain uncultivated, should immediately be burdened with higher duties in order to force its owner to either better cultivate that piece of land or to give up ownership. The true wealth of the state rests only on those goods, which are produced and gained within the country. Thus, he who leaves his land fallow reduces the wealth of the state. Therefore, if the increased burden does not have an effect, the government does indeed have the right to force the person legally to cultivate the land he owns, or to take away ownership of that particular piece of land. 33
Justi proposed the introduction of a burden or duty as an incentive to induce a change in behavior:
In the same way as one can discourage people from using their fields in a way, which is to the disadvantage of the common best one can stimulate them to produce those fruits on their land which are useful in developing commerce and a manufacturing industry. If one wants to stimulate the farmers to plant mulberry trees, saffron, dyer's-madder, dyer's woad, and such, then one should allow a field yielding that produce to remain entirely or partly free of duties. Then, there will be people who want to take advantage of this benefit.
In a similar way, these duties are also very effective incentives, if one wants to stimulate the production of a certain kind of livestock; or, vice versa, if one want to discourage this production with regard to the level of food supply and the common best. In the first case, one has to release all burdens, in the other case
33 The original German quote reads as follows: "Es ist in verschiedenen Ländern gewöhnlich, daß man denenjenigen Grundstücken, welche weniger genutzet werden, als ehedem, oder gar unbrauchbar liegen bleiben, eine Erleichterung, oder gar eine gänzliche Befreyung von denen Abgaben angedeihen läßt. Ich halte dieses vor eine mit der Wohlfahrt des Staats gar nicht übereinstimmende Regel. Ein jedes Grundstück, das aus Nachläßigkeit seines Besitzers weniger genutzet wird, oder gar uncultiviret liegen bleibt, sollte so fort mit höhern Abgaben beschwehret werden, um den Besitzer zu nöthigen, entweder dasselbe besser zu cultiviren, oder sein Eigenthum daran aufzugeben. Der wahre Reichthum des Staats beruhet blos auf den Gütern, die im Lande erzeuget und gewonnen werden; und derjenige, welcher sein Land uncultiviret liegen läßt, entziehet dem Staate allemal etwas von seinem Reichthum. Dahero, wenn die erhöheten Abgaben keine Wirkung haben, ist die Regierung allerdings befugt, gesetzlich anzubefehlen, daß er seine in Besitz habende Oberfläch binnen gewissen Jahren cultiviren, oder seines Eigenthums daran verlustig erkläret werden soll." Von Justi, 1761, op. cit. , p. 618: XII. 89
one has to impose heavy duties on raising this particular kind of livestock. In both cases, the final goal will not be missed. 34
Justi showed that the state could motivate people to act in the interest of the common best by using duties and burdens as incentives. He wanted farmers to produce enough food to prevent starvation, but also thought of the possibility of overproduction of specific agricultural products, which had to be prevented.
How to Abolish Begging
Justi distinguished between different kinds of beggars. He held that that there is no reason to beg for a healthy person who can work, and who is therefore able to achieve the subsistence level. For those beggars who are healthy Justi proposed to establish workhouses. The state should only care for those people too sick to work or too old. As "a sure means to entirely abolish begging in the country," Justi suggested to take the following measures:
My proposal is therefore to establish enough workhouses in a country. The principal of the state has to make it public and well known to everyone. After that, all those who continue begging, will immediately be forced to work in the workhouse. They will be put under strong supervision. All those who continue begging will be imprisoned without further investigation. Every day, they will have to do a certain amount of work. If necessary, they will be forced to work. In return for their work, they will be fed and given shelter.
34 The original German quote reads as follows: "Wenn man die Unterthanen durch die Abgaben von einem Gebrauch ihrer Aecker abhalten kann, welcher dem gemeinschaftlichen Besten nachtheilig ist; so kann man sie hingegen durch eben diesen Weg aufmuntern, solche Früchte auf ihren Aeckern zu erzeugen, welche zu Beförderung der Commercien und Manufacturen nützlich sind. Will man die Unterthanen zur Pflanzung der Maulbeerbäume, zum Anbau des Safrans, der Färberröthe, des Waides und dergleichen aufmuntern; so gestehe man einem Acker, welcher damit bepflanzet ist, die Befreyung von Abgaben ganz oder zum Theil zu; so werden sich allemal Leute finden, welche sich dieses Vortheils zu Nutzen zu machen suchen. Eben dieser Weg der Abgaben ist sehr wirksam, wenn man die Unterthanen zu häufiger Unterhaltung dieser oder jener Art von Haushaltungsvieh, anreizen, oder auch davon zurück halten will, wenn man sich mehr darauf befleißigt, als es dem Zusammenhange des Nahrungsstandes und dem gemeinschaftlichen Besten gemäß ist. In dem ersten Falle darf man nur alle Abgaben darauf aufheben, in dem andern Falle aber die Unterhaltung dieser Art von Vieh mit starken Abgaben belegen; so wird der dabey habende Endzweck nicht verfehlet werden." Johann Heinrich Gottlob von Justi. 1761, op. cit ., p. 624, 625: XII. "Von Leitung des Nahrungsstandes durch die Abgaben." 90
Every healthy person can perform various kinds of work. Everyone can work so much as to earn his subsistence level. Therefore, the principal of the state will have no other costs but those of establishing the institution in the first place; and he could even get considerable revenues from it. In order to offer the required employment possibilities, a sufficient number of factories and manufactures would have to be established in the state. According to age and sex, every person [in the workhouse] would have to perform labor for those factories and manufactures. It is indeed not necessary to keep the people on bread and water and to mistreat them with daily beatings, with the exception of those who do not want to follow their daily work routine. One could give everyone several pounds of bread per day, as well as a vegetable at noon and a soup in the evening and in addition to it a thin beer. It would still be to the advantage of the principal of the state. Even the older and indigent people could weave twenty threescore of linen per day or spin woollen threat. Without unduly diligence, this will cover their cost of living and is apart from the gain that results to the principal of the state from operating these manufactures.
The very old and indigent people, as well as those who are too fragile to work, have to be admitted to special poorhouses and have to be cared for as described above; and one can be sure, these will only be very few people as compared to all other beggars. The children of the people in the workhouses should be admitted to children's homes and be cared for in the same way. The children would have to stay in children's homes until the boys reach the age required to learn a certain trade or to perform a manual task, and the girls become maids. This has the advantage that these children develop a proper work attitude and get used to honestly earning a living, instead of becoming beggars themselves. The poor- and children's homes could be supported from the surplus that is gained from the workhouses. To the principal of the state, a sizeable income would remain. 35
35 The original German quote reads as follows: "Mein Vorschlag gehet demnach dahin, in einem Lande genugsame Arbeitshäuser anzulegen: und nachdem der Landesherr zu jedermans Wissenschaft öffentlich hat bekannt machen laßen, daß alle diejenigen, die sich künftig weiter des Bettelns bedienen werden, sofort in denenselben zur Arbeit angehalten werden sollen, als denn sofort die allersträngste Aufsicht halten, und alle diejenigen, so weiter betteln, ohne alle Untersuchung, warum er es thut, darinnen einsperren zu laßen, ihnen eine gewisse Arbeit täglich vorzuschreiben, worzu sie widrigenfalls mit Zwangsmitteln angehalten werden; und sie dargegen zu unterhalten. Da ein jeder gesunder Mensch in allen Arten von Arbeiten täglich so viel verfertigen kann, daß er seinen nothdürftigen Unterhalt verdienet; so würde der Landesherr ausser dem Vorschutz zur ersten Einrichtung gar keine Kosten darauf verwenden dürfen, sondern er würde vielmehr daraus noch ansehnliche Einkünfte ziehen können. Es müßten nämlich, um die erforderliche Arbeit zu verschaffen, zulängliche Fabriken und Manufacturen angelegt werden, zu deren Behuf ein jeder, nach Beschaffenheit seines Alters und Geschlechts, zu arbeiten hätte. Es ist garnicht nöthig, daß sie bey Wasser und Brod arbeiten, und mit 91
The Human Toll of Winter Campaigns
Justi held that soldiers should not be forced to fight during wintertime. War is harder on people during wintertime and more people will die, some of them later if they return home weakened. It is also likely that war, which started in wintertime, will continue during the summer. This will worsen the misery caused by war. Justi gave the following advice:
Soldiers should not be sent to any mission if the time of year is adverse, or in disregard of nature.
It is still very doubtful whether the winter campaigns that started to become common in the middle of Europe around 1740 are to be received with approval or disapproval. Yet one can dig up some reasons as arguments in support of those campaigns.
Sometimes, when met by surprise, the enemy can be overwhelmed in a winter campaign at once. This saves a lot of misery, unhappiness and bloodshed that tends to accompany a protracted war campaign. While the heat of the summer
täglichen Schlägen gemißhandelt werden, ausgenommen in dem Fall, wenn sie ihre tägliche Arbeit nicht verrichten wollen. Man könnte jedem täglich einige Pfund Brod, sodann des Mittags ein Gemüse, und des Abends eine Suppe, benebst einem dünnen Biergetränke reichen laßen; und der Landesherr würde dennoch Vortheil dabey haben. Auch etwas alte und unvermögende Leute können ohne großen Fleiß täglich 20 Schock Leinen oder wollen Garn spinnen; und dadurch ist ihre Kost bereits bezahlet, ohne den Vortheil zu rechnen, der aus den Manufacturen erwächst. Die ganz alten und unvermögenden Leute, desgleichen diejenigen, welche so sehr gebrechlich sind, daß sie unmöglich arbeiten können, müssen in besondere Armenhäuser gethan und darinnen mit der vorbeschriebenen Kost verpfleget werden; und man kann versichert seyn, daß deren in Ansehung der andern Bettelleute sehr wenig seyn werden. Eben so müßten die Kinder dererjenigen, so in den Arbeitshäusern befindlich sind, in gewissen Waisenhäusern erzogen werden, biß die Knaben das erforderliche Alter haben ein Handwerk oder gewisse Handthierung zu erlernen, die Mägdchen aber in Dienste zu gehen. Man würde davon den Vortheil erhalten, daß diese Kinder zur Arbeit und sich ehrlich zu nähren angewöhnet, nicht aber gleichfalls Bettelleute würden. Diese Armen- und Waisenhäuser würden von dem Überschuß der Arbeitshäuser gar füglich unterhalten werden können; und es würde gewiß noch ein ziemliches Einkommen vor den Landesherren übrig bleiben." Johann Heinrich Gottlob von Justi. 1761, op. cit ., p. 230 - 232: XVI. "Sicheres Mittel, das Betteln im Lande gänzlich abzuschaffen." 92
also causes an uncomfortable situation to the soldiers in many ways, often causing illness and death of soldiers, this source of distress is relieved by a winter campaign. For this reason, winter campaigns are frequently held in Portugal and Spain, and sometimes in Italy, and during the heat of the summer, soldiers are moved to their refreshment quarters.
These reasons can be refuted by the argument that a winter campaign can only lead to an advantage over the enemy when it is entirely unexpected. However, if winter campaigns become customary, then the enemy will be ready for defense. Then, a lengthy battle cannot be prevented by a surprise attack. It is further a fact that winter campaigns go along with much more trouble than regular attacks in the summer. We do not know for sure whether winter campaigns cause more illnesses than campaigns in the summer. There is evidence from Saxony, France, and Bavaria that shows that soldiers who participated in the first winter campaigns against Bohemia often died upon their return.
For many other reasons winter campaigns have to be rejected. In fact, as war during the winter is continued during the summer, the misery of war so damaging to mankind is even doubled. Nature itself advises against war during the winter. 36
36 The original German quote reads as follows: "Daß man die Soldaten zu keinen Unternehmungen wider die Jahreszeit und Beschaffenheit der Natur gebrauchen solle. Es ist noch sehr zweifelhaftig, ob die Winterfeldzüge, welche seit 1740 angefangen haben, in dem mitternächtlichen Theil von Europa gewöhnlich zu werden, zu billigen, oder zu verwerfen sind. Man kann allerdings einige Gründe ausfündig machen, welche dergleichen Feldzügen das Wort zu reden scheinen. Es läßt sich öfters der Feind, der in keiner Gegenverfassung stehet, durch einen solchen Winterfeldzug mit einem Male über den Haufen werfen; und so viel Elend, Unglück und Blutvergießen, welches allemal einen langwierigen Krieg zu begleiten pfleget, kann dadurch vermieden werden. Gleichwie auch die große Hitze des Sommers denen Soldaten vielerley Ungemach verursachet, worauf öfters häufiges Kranken und Sterben zu entstehen pfleget; so scheinet auch dieses durch die Winterfeldzüge gehoben zu werden, wie denn in der That dieser Ursachen wegen in Portugal und Spanien, auch öfters in Italien, die Kriegsverrichtungen im Winter vorgenommen werden, und dargegen in der Hitze des Sommers die Erfrischungsquartiere bezogen werden. Allein diesen Gründen stehet entgegen, daß ein Winterfeldzug nur alsdenn über den Feind Vortheil zuwege bringet, wenn er ganz unerwartet ist. Dahingegen wenn es einmal zur Gewohnheit geworden ist, der Feind sich gleichfalls in Gegenverfassung setzet, und mithin dadurch die Langwierigkeit des Krieges nicht vermieden wird. Es ist auch gewiß, daß die Winterfeldzüge viel mehr Ungemach bey sich führen, als die ordentlichen Feldzüge im Sommer; es ist ungewiß, ob nicht daraus noch mehr Krankheiten entstehen müssen. Wenigstens sind die Sachsen, Franzosen und Bayern nach den ersten Winterfeldzügen in Böhmen häufig dahin gestorben. 93
Justi opposed war, but war in the winter even more so as it caused more misery for mankind. He not only took those soldiers into consideration who died during the war, but also those soldiers who died from exhaustion after they returned home.
Health Measures Against the Depopulation of a Country
In his Grundfeste (Basic Pillars), Justi proposed the furthering of happiness of the population as the major aim of state policy, and by implication state power. 37 Such a policy implies increasing the number and the duration of the useful lives of the population. Justi complained about the fact that infectious diseases often hit states with the highest population and not seldom cut the population in half. Evidence that he wanted to maximize the health of the population can be found in the measures he suggested against the depopulation of a country.
Justi advised the creation of a healthy environment. He wrote that in North America "the main reason of depopulation is without doubt a natural unhealthy condition of the country .... too much moisture in the air and rotten evaporations ... the main reason are the many woods, lakes and morasses. Despite the fact that this is a natural cause, it can nevertheless be removed." 38 Justi identified an unhealthy environment as a source
Dahingegen sind so viele Gründe wider dergleichen Winterfeldzüge vorhanden, daß man fast keinen Anstand nehmen kann, sie gänzlich zu verwerfen. Da man dennoch auch nicht aufhöret, die Kriegsverrichtungen im Sommer vorzunehmen; so wird dadurch das Elend des Krieges, welches dem menschlichen Geschlecht bereits ohnedem schädlich genug ist, verdoppelt. Ja! die Natur selbst widerstreitet dergleichen Kriegsverrichtungen im Winter." P. 282/283 in Johann Heinrich Gottlob von Justi. 1761. Politische und Finanzschriften über wichtige Gegenstände der Staatskunst, der Kriegswissenschaften und des Cameral- und Finanzwesens . Koppenhagen/Leipzig: Rothen. 37 This is already indicated by the title: Basic Pillars of Power and Happiness of the States or Encompassing Representation of the Entire Police Science. First Volume, which Presents an Encompassing Treatment of Perfect Culture of the Land, of Population, of Agriculture, Growth and Pride of the Cities, as well as of Manufactures, Factories, and Commerce and the Coherence of the Entire Circuit Responsible of Nourishment. In the original: Johann Heinrich Gottlob von Justi. 1760. Grundfeste zu der Macht und Glückseligkeit der Staaten oder ausführliche Vorstellung der gesamten Policey-Wissenschaft. Erster Band, welcher die vollkommene Cultur des Bodens, die Bevölkerung, den Anbau, Wachsthum und Zierde der Städte, desgleichen die Manufakturen, Fabriken und Commercien und den Zusammenhang des ganzen Nahrungsstandes abhandelt. Königsberg/Leipzig: Johann Heinrich Hartungs. 38 The original German quote reads as follows: "Die hauptsächliche Ursache der 94
of illness and he realized that illness could also be caused by a lack of social hygiene and carelessness during food preparation. Consequently, he did give guidelines for developing institutions of social hygiene and he discussed safety standards for the handling and preparation of food. 39
Deficiencies in availability and quality of health care provision were important causes of high mortality due to diseases, which could even lead to depopulation. Justi wrote "... that there are either not enough health institutions to fight pest and other epidemic illnesses or that physicians and other persons who are needed to maintain life and health of people lack the knowledge required for their task." 40
Justi proposed to control plague and other contagious diseases by measures of blockade and quarantine on the borders of the country. He also recommended the institution of a Health Policy Council in order to gather data on mortality, morbidity, and epidemics and to devise an appropriate health policy on that basis. In the seventeenth and eighteenth centuries, it was not uncommon that plague would cut the population of a state in half. Justi suggested state intervention in the control and prevention of such contagious diseases (see paragraph 293). He advised to discontinue all contact and trade with people from countries, where the disease has occurred. The borders of the state should be protected in order to enforce this measure. If it was doubtful whether someone had been in contact with a disease, then this person should be put in quarantine at an isolated location for forty days. The protection should include goods and mail, which should either not be delivered at all, or, if possible, be treated with smoke, etc. If the people of a city or larger region were infected, then soldiers should be ordered to isolate the entire area.
Entvölkerung ist wohl ohne Zweifel eine natürliche Ungesundheit des Landes. [...] Allein, wenn die Ungesundheit von der allzu großen Feuchtigkeit der Luft und denen faulen Ausdünstungen entstehet, so in derselben befindlich sind; so ist die Ursache fast allemal den im Lande vorhandenen häufigen Wäldern und vielen Seen und Morästen beyzumessen; und obzwar diese Ursache gleichfalls natürlich ist; so kann sie doch allerdings gehoben werden, wie wir oben im ersten Hauptstück schon erinnert haben. [Hinweise auf Nordamerika]." Justi v., 1760, op. cit ., "Neuntes Hauptstück. Von denen Maßregeln wieder die Entvölkerung des Landes." (IX. Main Chapter. Measures against the Depopulation of a Country.) P. 247 - 256 - 263, Paragraph 291. 39 Justi v., 1760, op. cit . "Erster Abschnitt. Von denen Medicinal-Anstalten." (Part I. On Medical Institutions), pp. 249-256. 40 The original German quote reads as follows: "Alle übrigen Ursachen der Entvölkerung kann man in zwei Klassen bringen. Sie kommen entweder darauf an, daß die Menschen aus Mangel der Anstalten wieder die Pest und epidemische Krankheiten; und aus Unwissenheit der Ärzte und andrer Personen, die zu Erhaltung des Lebens und der Gesundheit der Menschen gebrauchet werden, zu frühzeitig ihren Tod finden; oder die Menschen gehen aus verschiedenen Ursachen außer Landes." Justi v., 1760, op. cit . Paragraph 292. 95
Justi also proposed to set up a Health Policy Council that would gather death statistics and data on illness and, based on this information would have the task to devise an appropriate health policy.
In order to take effective measures against the plague and other contagious diseases in each state a Health Policy Council has to be formed. It will consist of experienced civil servants on the one hand and well-known medical doctors on the other, each forming half of the body. 41
The board would have to be notified of diseases and the causes of death, there being a requirement of notification and of providing death rolls. The board's tasks include the observation of neighboring countries and immediately taking action to prevent pest or other contagious diseases from spreading across the border. The board should also observe whether there are epidemic or other widespread illnesses in a region and provide medical information to local physicians or send a physician to that area. The Health Policy Council has to evaluate the death rolls, to determine the causes of epidemic diseases, and it has to bring out advice on the best health policy and medicine used in order to prevent an epidemic. In general, the Health Policy Council has to undertake broad measures to advance the state of health of the population and to prevent unhealthy conditions and illness.
In addition to the Health Policy Council , Justi proposed to establish a Medical Board to assure that there is an adequate supply of physicians in a country. A second task would be to enforce quality standards of health care provision.
To ensure that there will be a sufficient number of skilled physicians in a country should best be the task of a Medical Board (Collegium Medicum). One-half of it could consist of high civil servants from the departments of the Interior and Justice and the other half of the most learned and well-known physicians. The Medical Board can be united with the Health Policy Council in such a way that they form two different departments of the latter. The Medical Board does not only have to test skill and scholarship of the new physicians, independent of the degrees and honors they have received at Universities ... The Medical Board also has to decide about complaints of malpractice of physicians and surgeons, midwifes and other health care providers. 42
41 The original German quote reads as follows: "Um nun wieder die Pest und andere ansteckende Krankheiten deßto zuverlässigere und wirksame Anstalten zu machen; so ist in einem jeden Staate ein Collegium Sanitatis nöthig, welches zur Hälfte aus geschickten Staats- und Policey-Bedienten, und zur anderen Hälfte aus berühmenten Ärzten bestehen kann." Justi v., 1760, op. cit . Paragraph 294. 42 The original German quote reads as follows: "Diese Vorsorge [daß das Land mit geschickten Ärzten versehen werde] kann am besten durch ein Collegium Medicum ausgeübt werden, welches gleichfalls zur Hälfte aus verständigen Staats-, Policey und Justizbedienten, und zur anderen Hälfte aus denen gelehrtesten und berühmtesten Ärzten bestehen muß, und mit dem Collegium 96
Justi argued that quality control in medicine is required, because professionals in medicine would better be able to hide malpractice than scholars of theology or scholars of jurisprudence. The argument that there is no medicine to prevent death could be misused to cover up serious professional mistakes. From medical malpractice, both the state and the population would suffer. It is difficult to control physicians, therefore a self- selection takes place in which the lesser able students turn to the field of medicine. In order to prevent a negative self-selection, Justi suggested to require a quality control of physicians seeking admission. The Medical Board should turn down all those who show insufficient or even average knowledge.
An important part of the tasks of the Medical Board would be the control of quacks. It has to prevent treatment and medicine prescribed by unqualified persons being detrimental to the population. In order to prevent that the poor who cannot afford to visit a regular physician, would be forced to go to an unqualified health care provider, special physicians should be appointed who treat the poor for free. Every sizeable city and region should appoint a physician for the poor, who would also provide medicine for free. An additional point of observation is hospitals. They should be kept under close supervision and must be clean; otherwise, people might die instead of recover. Justi considered carelessness of hospital employees as a crime because it could lead to the death of a patient. He also suggested that young physicians should gain at least one year of experience in a hospital or other institution before they get admitted as physicians. 43
Justi suggested that the highest body of a country's police should stimulate the study of medicine. It should not only see to it that all health-related sciences at the university prosper, but also that new discoveries would be made. By introducing a "Collegio medico," data of the effects of medicine and of illness could be discussed by a group of physicians and thus new insights could be gained, if only, one could prevent physicians from quarrelling among each other. 44
Justi proposed training and approbation of surgeons and midwifes. For surgeons, as
Sanitatis insoweit vereiniget seyn kann, daß sie zwey besondere Departements derselben ausmachen. Dieses Collegium muß nicht allein die Geschicklichkeit und Gelehrsamkeit der neuangehenden Ärzte genau prüfen, ohne darauf Betracht zu machen, ob sie auf Universitäten gelehrte Würden erhalten haben;* sondern es muß auch über alle Klagen erkennen, die über die Ungeschicklichkeiten der Ärzte und Wundärzte, Hebammen und dergleichen geführet werden. [Fußnote:] * Diese genaue Prüfung ist umso nöthiger, da, ich weiß nicht was vor ein unglückliches Schicksal über die Arzeneykunst verwaltet, daß sie am meisten die Zuflucht der schwachen Geister ist ..." Justi v., 1760, op. cit ., Paragraph 295. 43 "Aufmerksamkeit auf die Pfuscher und Bestellung der Armen-Ärzte." Justi v., 1760, op. cit ., Paragraph 296. 44 "Wie die Arzeneykunst auf andere Art in Flohr zu bringen ist. (Zänkereyen der Ärzte durch Pflichtcollegien vermeiden)." Justi v., 1760, op. cit ., Paragraph 297. 97
well as midwifes, professional boards, Collegio chirurgico , should be introduced. No one should be admitted to practice as a surgeon or midwife who has not been tested before the board and proven that he or she has the skills needed. 45
In a similar way, apothecaries and druggists, who provide ingredients for the preparation of medicine, should be controlled by testing, visitations, and training. 46 For other causes that could endanger health, Justi suggested to take a look at the architecture of the cities, canalization, and hygiene of cities. In particular, he suggested the control of foodstuffs. 47
Persons should be discouraged from committing suicide. Therefore, the attitude in a society should change, in particular, if suicide is regarded highly as a measure that proves courage. According to Justi, society should attribute a negative value to the commitment of suicide in order to discourage people from committing suicide. 48
Public Health Tradition in Cameralism
Justi distinguished between the art of politics ( Staatskunst ) and the science of policy and public administration ( Policeywissenschaft .) The task of the former is to maintain the inner and outer security of the state. The latter is the science of how to maintain and increase the wealth of the state, which consists of different components including health of the population. Growth and improvement of the population increase the wealth of the state.
In contrast to the art of politics, it is the task of policy and public administration to maintain and increase the entire wealth of the state by a good inner constitution. To realize this goal, civil servants should confer as much inner power and strength to the republic as is possible. For that purpose, their efforts are directed towards cultivating the soil, towards improving the basis of living, and towards maintaining discipline and order in the commonwealth; 49
45 "Unterricht und Prüfung der Wundärzte und Hebammen." Justi v., 1760, op. cit ., Paragraph 298. 46 "Unterricht, Prüfung und Visitationen in Ansehung der Apotheker und Materialisten." Justi v., 1760, op. cit ., Paragraph 299. 47 "Andere, der Gesundheit nachtheilige, Umstände." Justi v., 1760, op. cit ., Paragraph 300. 48 "Von dem Selbstmord." (On suicide). Justi v., 1760, op. cit ., Paragraph 301. 49 The original German quote reads as follows: "Dahingegen beschäftigt sich die Policey mit nichts, als das gesamte Vermögen des Staats durch gute innerliche Verfassungen zu erhalten und zu vergrössern und der Republik alle innerliche Macht und Stärke zu verschaffen, deren sie nach ihrer Beschaffenheit nur immer fähig ist. Zu dem Ende suchet sie die Länder zu cultiviren, den Nahrungsstand zu verbessern und gute Zucht und Ordnung in dem gemeinen Wesen zu erhalten;" Johann Heinrich Gottlob von Justi. 1969. Grundsätze der 98
Justi compared the science of policy and public administration to the science of Cameralism:
Policy and public administration are at the basis of true Cameralism; and the civil servant has to prepare the ground in order to enable the Cameralist to harvest without damaging the commonwealth. Yet, both sciences have their clear and undisputed limits. Policy and public administration tries to maintain and increase the entire wealth of the state according to its inner constitution; and the Cameralist tries to withdraw from this total wealth of the state the capital that is required to cover the large expenditures necessary for governing the states, without causing harm to the former. 50
In delineating the tasks of policy and public administration, Justi built on Christian Freiherr von Wolff. 51 Justi has to be credited for the development of the concept of policy and public administration, which included systematic state measures to improve the health of the population. He proposed measures of sanitation and hygiene and a board to control the quality of health care. His proposals influenced practical health policy. In 1725, King Frederic Wilhelm I. enacted a public health law and appointed academic and practical physicians to a public health board in order to enforce the law.
As a Cameralist, Justi was important in founding the public health tradition on the Continent. We also find contributions by other Cameralists who focussed on public health. 52 Notably with the physician and Cameralist Johann Peter Frank (1745-1821) this tradition reached its top. While there are individual differences among Cameralists they have in common that they see health as an important factor for the development of the economy. They devised public health policies in order to enhance the health of
Policeywissenschaft. (Principles of Police Science). Frankfurt a. M.: Sauer & Auvermann KG. Vorrede der ersten Ausgabe, p.*4. 50 The original German quote reads as follows: "Die Policey ist der Grund der ächten Cameral=Wissenchaft; und der Policey=Verständige muß säen, wenn der Cameralist ohne Nachtheil des gemeinen Wesens ernden soll. Allein dem ungeachtet haben beyde Wissenschaften ihre gewissen und unstreitigen Gränzen. Die Policey bemühet sich, das gesamte Vermögen des Staats nach seiner innerlichen Verfassung zu erhalten und zu vermehren; der Cameralist aber beschäftigt sich, aus diesem gesamten Vermögen des Staats das bereiteste Vermögen ohne Nachtheil des erstern zu Bestreitung des grossen, zur Regierung erforderlichen, Aufwandes herauszuziehen." Johann Heinrich Gottlob von Justi. 1969. [Reprint ot the third improved edition with comments, Johann Beckmann (ed.) 1782. Göttingen: Vandenhoek]. Grundsätze der Policeywissenschaft . (Principles of Police Science). Frankfurt a. M.: Sauer & Auvermann KG. Vorrede der ersten Ausgabe, p. *4. 51 Johann Heinrich Gottlob von Justi. 1969, op. cit. , Vorrede der ersten Ausgabe, (Preface to the first edition), p. *5. 52 See, e.g . Johann Heinrich Jung, 1788, op. cit ., "Medizinal-Polizey," (Public Health Administration), pp. 17 - 46. 99
the population, thereby contributing directly and indirectly to the wealth of the states.
4.4 Relevance of Justi's Thought
Similar to the idea of Cameralists - health is part of the wealth of the state - modern health economists hold that health is a part of human capital. 53 Fuchs further developed the idea that the value of improvements to health is measured both in consumption and production. We value being healthy both for its own sake and for its contribution to the production of other goods. 54 Empirical evidence shows that improved health conditions can influence the work capacity of people, for instance of older citizens, thus allowing increasing the legal retirement age of 65. 55
Cost-effectiveness evaluations typically link medical measures to health effects, which are defined as "the sum of the years of life added by the intervention; and the improvements in health during years that would have been lived anyway, minus any deterioration in health because of side effects of the intervention." 56 Additional data are needed to link health effects to work capability.
While better health is an important route to improved work capability, not all benefits of better health can be so translated. Woodbury and Manton researched the link between health effects and work capability of older people.57 They applied factor analysis to the 1982 National Long-Term Care Survey and identified five major patterns of disability. The survey included 6,400 chronically disabled people who were older than sixty-five and did not live in institutions. It provided information on how well they could perform "activities of daily living (ADL's)." 58 "The first three groups, and certainly the first, should be capable of performing some kind of work. For the second and third groups, the work would need to be tailored to their physical limitations. The fourth and fifth groups would not be capable of working." (Russell, op. cit ., pp. 23). Using regression analysis, Woodbury and Manton linked the five patterns of disability to the twelve major diseases he had identified. They showed that the healthy group of sixty-seven-year-olds could
53 Mushkin, S. J. 1962. "Health as an Investment." Journal of Political Economy . Vol. 70. Supplement, pp. 129. 54 Victor R. Fuchs. 1972. "The Contribution of Health Services to the American Economy." Victor R. Fuchs. Editor. Essays in the Economics of Health and Medical Care . New York: National Bureau of Economic Research. 55 Ursula Backhaus. 1991. Book Review: Louise B. Russell. Editor. 1987 Evaluating Preventive Care: Report on a Workshop . Washington, DC: Brookings Institution. Business Library Review , Vol. 17 (1), 1991, pp. 48-51. 56 Louise B. Russell. Editor. 1987 Evaluating Preventive Care: Report on a Workshop . Washington, DC: Brookings Institution, p. 4. 57 M. A. Woodbury and K. G. Manton. 1982. "A New Procedure for Analysis of Medical Classification." Methods of Information Medicine . Vol. 21, pp. 210-20. 58 ADL refers to a standard series of activities and is widely used to measure disability. Russell, op. cit ., p. 22. 100
be increased from 31 percent to 48 percent of the total, if all twelve diseases could be eliminated. The greatest impact would come from eliminating hip fractures, strokes, and senility.
Evidence from international epidemiological studies shows that working capability is influenced by smoking. Smokers are more prone to illness and face a higher death risk than non-smokers. With the exception of older women, smokers take more sick days than non-smokers. Interventions directed at preventing people from starting to smoke, such as school programs, might have the greatest long-run effect on working capability. (Russell, op. cit ., p. 37). Interventions that are directed at helping people to quit smoking increase working capability in the short run. Despite the wealth of data in this area, many doubts remain. For instance, the relationship between smoking and morbidity is not as well documented as the relationship between smoking and mortality. A forecast of future smoking behavior and the nature of future cigarettes would even increase the uncertainty concerning the data.
Sports increases working capability, for example by reducing fatigue, anxiety, and depression. (Russell, op. cit ., p. 43). Several studies of aerobic exercise directed at strengthening lungs and heart have suggested positive effects for most people from active participation in sports. Exercise can keep the elderly healthier. Incorporating easy activities into people's lives is a practical intervention; and more attention should be given to integrate exercise into daily lives. A study showed that schoolchildren, who followed a program that worked exercise into their daily lives, continued the exercise after a year, whereas other children who had followed a regular exercise program had given it up. (Russell, op. cit ., p. 45). Exercise differs from other forms of preventive medicine in two respects; it takes time, which is a cost to most people, and it is a pleasure, leading to a benefit. Several specific cost-effectiveness analyses are required to evaluate the health effects of different forms of exercise.
The working ability of people is likely to be reduced by osteoporosis, a widespread condition that leads to fractures, primarily of the wrist, hip, and spinal vertebrae. (Russell, op. cit ., p. 54). Its consequences are severe; people who survive the fractures are likely to lose their independence. Women are at higher risk than men are. The number of fractures could be cut by interventions such as calcium supplementation, oestrogen-therapy, weight-bearing exercises, etc., but the effect of fractures on people's ability to function is not well documented.
Cost-effectiveness studies of alcoholism are considered controversial because of insufficient evidence. The database is insufficient for drawing conclusions about the impact of drinking on capability to work. It is still considered beneficial to cure alcoholism, because the use of medical services declined after alcoholics quit drinking. (Russell, op. cit ., p. 58). Alcohol use takes different forms; therefore, the types of interventions vary. Excessive alcoholism has adverse health effects, such as delirium tremens and cirrhosis of the liver. Alcoholism is a major cause of accidents and has negative social effects. Excessive drinking impairs the capacity to work. Drinkers have shorter lives and require more hospitalization than non-drinkers require. It is difficult to connect health problems causally to the misuse of alcohol, because alcoholics behave 101
differently from non-alcoholics. Today, common interventions include high prices for alcohol or consumption restrictions. Most treatments are for excessive alcohol use once it has occurred. Chances of treatment are best for people who want to be cured, who have stable jobs and marriages, and who come from an upper socioeconomic background. Most people cure themselves without help. Those who quit are healthier and use fewer medical services, so there are reasons to continue fighting alcoholism. A possible intervention is education and social pressure to discourage people from drinking in inappropriate situations such as driving and on the job.
Obesity is a condition where the distribution of excess body fat matters. It is usually associated with diabetes, hypertension, gallbladder disease, and a higher risk of death. Cost-effectiveness studies can be performed for surgery, appetite depressants, and high carbohydrate, low fat diets, which are some of the remedies for obesity. The extremely obese often show great improvements after surgery, but the effects on work capability have not been studied in much detail. (Russell, op. cit ., p. 63).
This brief illustration of a few examples of cost-effectiveness studies and the effect of an intervention on working capability serves the purpose at hand to show that health care expenditures can increase the working capability in specific areas and in the long run, and make it even likely to increase the retirement age. Therefore, in a public household, those health care expenditures, which enhance the ability to produce and consume, should be entered as a figure of investment that have possible future benefits.
4.5 Summary and Conclusions
In Cameralism, people are viewed as a major part of the wealth of a country and their advice to the princes of the under populated German states was to carry out population policies to improve and increase the population. Cameralists recommended measures to improve the health of the population and the level of education, they suggested incentives to attract immigrants and resources from other countries, and they discouraged feudal princes from making war. In this paper it has been shown that the Cameralists were not only concerned with the treasury, but also with the police functions. The task of the science of policy and public administration is to study the ways and means to increase the wealth of the state. Measures to improve health are primarily seen as an investment component that leads to higher economic growth. Public health policy goes beyond a narrow concern with health. For instance, the soil has to be improved by agriculture in order to create a broad basis of nutrition. It was mainly Justi, who was concerned with the quality of health care provided. He suggested controls to prevent infectious diseases from entering a country, measures of hygiene in the cities, controls of foodstuff, and he proposed the introduction of a Health Policy Council and various medical boards to supervise quality of health care.
The view that health care expenditures and preventive health care are an investment that contributes to economic growth is still relevant today. It is a warning against taking 102
measures that focus on a reduction of costs and neglect the quality of health care provided. Better health improves the capacity to function and the benefits from this should not be overlooked in public households.
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106
Chapter 5
Wilhelm Roscher’s (1817-1894)
Historic Method and Health Issues
Contents
5.1 Introduction
- Wilhelm Roscher (1817-1894), his Life and Work
5.2 Health Related Aspects in Roscher's Thought
- The Historic Method
- The Organic Construction of Society
- Limits of the Division of Labor
- The Social Question, Poverty and Illness
5.3 Public Regulations
- Quality Controls of Commodities
- Safety Regulations in Factories
- Occupational Diseases
5.4 Summary and Conclusions
107
5.1 Introduction:
Wilhelm Roscher (1817-1894), his Life and Work
Wilhelm Roscher (1817-1894) has introduced the historic method to economics. 1 He used an eclectic, descriptive approach in order to describe the evolutionary laws governing the development of the economy of a nation. A nation is characterized by its law, the state, and the economy, but also by religion, language, art, and science. Roscher concentrated on the first three factors of influence in order to explain the political economy of a nation. 2 In line with Aristotle, he saw the family unit as the beginning of any nation's economy, and not the individual. In his work, we find important tenets for health economics. Roscher proposed the institution of social welfare services as well as public regulation to protect vulnerable groups in society, such as wage laborers, women, and children. He was a fervent advocate of the introduction of factory inspectors. In the Kingdom of Saxony, he was politically active in the implementation of his policy proposals. From today's point of view, his contribution lies in building institutions for health care services and in his reflections on what could be called, parallel to constitutional public finance, constitutional health economics.
Although he is not generally remembered as a health economist, Wilhelm Roscher emphasized health issues in both, theory and policy. This emphasis he took from the Cameralists. Roscher believed that theory could not be treated separately from practice. 3 In his economics lectures to law students at the University of Leipzig he propagated the introduction of social welfare services and public regulation in factories in order to protect workers and children. He was also politically active in the Kingdom of Saxony to achieve this goal. In 46 years he taught generations of students, and became considered the forerunner of American institutionalism. 4
1 Roscher is the founder of the older German Historical School, but the distinction between older and newer Historical School has been criticized as superficial. It served essentially strategic purposes. Menger introduced the term "Older Historical School" in order to be able to associate Roscher's work with it. Both, Roscher and Schmoller, worked empirically, but Menger wanted to base his own work on that of the "Older Historical School," and he opposed the work of Schmoller who according to Menger belonged to the "Younger Historical School." Jürgen Backhaus and Reginald Hansen. 2000. "Methodenstreit in der Nationalökonomie." (Methodenstreit in Economics). Journal for General Philosophy of Science. Vol. 31, pp. 307-336, see in particular p. 314. 2 Mark Perlman, Charles McCann. 1998. The Pillars of Economic Understanding . Ann Arbor. The University of Michigan Press, p. 418. 3 Jürgen Backhaus. 1995. "Introduction: Wilhelm Roscher (1817-1894) - a centenary reappraisal." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 4-15, p. 11. 4 Senn traced Roscher's influence in the United States back to his long teaching period. Many students he taught emigrated to the United States. Peter R. Senn. 1995. "Why had Roscher so much influence in the USA compared with the UK?" 108
From 1835 to 1839, Roscher studied in Göttingen and Berlin. 5 He wrote a doctoral thesis in 1838 in the philosophical faculty of the University of Göttingen, and, in 1840, he wrote at the same University his habilitation thesis in history and state sciences. In 1843, he became extraordinary, and in 1844 ordinary professor at the University of Göttingen. In 1848, he was called to a chair at Leipzig. Roscher was a member in professional associations and received several honorary doctorates and memberships in honorary academic societies.
His magnum opus was the System der Volkswirtschaft (The System of Political Economy) in five volumes (1854-94). The volumes deal with the historical treatment of the science of political economy (volume 1), agriculture and forestry (2), trade and commerce (3), public finance (4), and charities (5). In 1874, Roscher's Geschichte der Nationalökonomik in Deutschland (History of Political Economy in Germany) was published, and in 1851-52 Zur Geschichte der englischen Volkswirtschaftslehre (Towards a History of English Economics). He also wrote the standard work on comparative political constitutionalism, Vergleichende Rechtslehre . These main works are supplemented by many other writings. 6 In this chapter, we shall focus on his writings on health related issues.
Roscher, the influential economist who was well known inside and outside of Germany, is generally remembered as the founder of the historic method in political economics. His approach was descriptive and eclectic in the sense that he used every conceivable bit of empirical information that he could get. He used the existing theories, but did not add an own specific contribution to theory. His contribution lies in the historic method, which he introduced to economics. Krabbe has evaluated Roscher's approach as follows:
On the one hand, in presenting subjects like value, production and income, from classical theory, Roscher used the classical deductive approach which had originated with the Enlightenment. On the other hand, in dealing with the history of society and the development of institutions, Roscher adopted Herder's organistic and, to a lesser degree, idealistic ideas which had originated with Hegel. It should be remembered ... that half-way through the nineteenth century, eclecticism had become a significant cultural phenomenon. Thus, on this point Roscher's thought bears the hallmark of his time. 7
Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 53-105, p. 64. 5 The biographical information is mainly based on the following entry: "Roscher, Wilhelm Georg Friedrich." 1901 (2). Handwörterbuch der Staatswissenschaften. Jena: Gustav Fischer, pp. 463-465. 6 For his other writings also compare the entry on Roscher in the Handwörterbuch der Staatswissenschaften, op. cit. , p. 464-465. 7 Jacob J. Krabbe. 1995. "Roscher's Organistic Legacy." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies. Vol. 22, pp. 159-170, p. 162. 109
Kenessey saw eclecticism in Roscher's work, but related it to the theory of economic stages. He distinguished the following three attributes in Roscher's writings:
At any rate, when honoring Roscher's work the very first attribute (at least from the viewpoint of a statistician) is his wide reliance on data, facts, and information. His utilization of classical thought patterns to analyze such materials is another one. His emphasis on freedom and individualism appears to be a significant third attribute, and this connected him well to scholars outside Germany (especially in England and America). 8
The Christian faith was important to Roscher. His scientific work is based on a Christian-moral concept. He "takes the human being as a starting point and goal of economic science." 9 The human being, be it a teacher or a scholar, is responsible for all his scholarly life and otherwise before his god. Hence, the different spheres cannot be neatly separated. Roscher, who was not only a successful teacher (primarily of future civil servants in the modern Kingdom of Saxony), but also active in municipal politics, aspects of policy making in the kingdom, aspects of social welfare legislation, and involved in numerous appointment decisions, was intimately aware of the impossibility of drawing sharp lines between belief and science. 10 He made the difference clear between his scientific work and his religious values in his last, posthumously published book, Geistliche Gedanken eines National-Oekonomen (Religious Thoughts of an Economist). 11 This book, which is mainly based on his former publications, focuses on the religious aspects of his work. He wanted to keep his political and religious thoughts to himself, while at the same time trying to get them straight. One should think of this text as a diary, as a confidant.
Although Roscher was well acquainted with the theory of the English classical school, 12
8 Zoltan Kenessey. 1994. "Economic Stages: Roscher, the Historical School, and Others." A Note. Conference Volume. Sixth Annual Heilbronn Symposion in Economics and the Social Sciences. June 23-26, 1994. Wilhelm Roscher (1817- 1894). A Centenary Reappraisal . 9 Thanasis Giouras. 1995. "Wilhelm Roscher: the "historical method" in the social sciences: critical observations for a contemporary evaluation." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 106-126, p. 110. 10 Schmoller was particularly concerned with this issue and devoted regular seminars and his inaugural lecture as the Rector Magnificus of the University of Berlin to this subject. Compare his inaugural lecture, printed by Julius Becker, 1897. Wechselnde Theorien und feststehende Wahrheiten im Gebiete der Staats- und Socialwissenschaften und die heutige deutsche Volkswirtschaftslehre. (Changing Theories). 11 1896, Dresden: v. Zahn & Jaensch. 12 According to Schumpeter, Roscher was "a very meritorious follower of the English `classics.'" Joseph A. Schumpeter. 1954. History of Economic Analysis. New York: Oxford University Press, p. 508. 110
he had some reservations with respect to the doctrine of laissez-faire, which had gained considerable support among the German industrial community, some politicians, and even in universities. Kenessey has explained Roscher's reservations towards the English classical school in the context of stages of economic growth.
There are certain intriguing and broad questions about the interest of Friedrich List, Wilhelm Roscher, and other 19th century German economists (including Marx) in the stages of economic growth, as we call it today. The economic development level of Germany, as compared with England, was an important impetus to German thinking about these matters at the time. The stance to take in respect of free trade (and the protection of domestic industries from foreign - principally British - competition) was a related one. However, one should assume, theoretical problems played a role as well and thinking about growth in the economy was motivated, therefore, by inner developments in economics as well. It is believed that List certainly, but possibly Roscher as well recognized this conceptual need, as categories of classical economic thought, which were first developed for the Britisch economy needed to be applied in countries which were at a less developed stage at the time. (Kenessey, op. cit. , p.5).
Roscher was influenced by Friedrich List who held that an industry "... must be protected before it can be established. Adam Smith's principles of political economy, therefore, were not of universal applicability, but were relative to time and place." 13 Balabkins continued that some "German historical economists or economic historians, such as Wilhelm Roscher, Bruno Hildebrand and Karl Knies, not only rejected the claim of universal validity and applicability of classical economics, but insisted that it was grossly inadequate to deal with industrialization and its social consequences, not to speak of its irrelevance, for Germany." (Balabkins, op. cit. , p. 25). Balabkins' judgment is different from that of Schumpeter, but the contrary positions can be reconciliated, if we keep in mind that Schumpeter wanted to contribute to economic analysis, while Balabkins wrote his book Not by Theory alone ... with respect to social policy. Therefore, it is understandable that both authors arrive at different judgments of Roscher's work.
There is hardly an aspect not treated by Roscher. His arguments lie at different levels, though. Some of Roscher's remarks on health and health economics clearly refer to constitutional health policy. Economic theory distinguishes between process and structural theory. Buchanan asked in The Limits of Liberty under which structures process and structural theory would be applied. 14 One distinguishes between three political levels, the executive, legislative, and constitutional level. Accordingly, there are three types of health policy, executive, legislative, and constitutional health policy.
In what follows, we will first look at health issues that Roscher emphasized in theory,
13 Nicolas Balabkins. 1988. Not by Theory alone... The Economics of Gustav von Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, p. 25. 14 James Buchanan. 1993. 5 The Limits of Liberty: between Anarchy and Leviathan. MacGill: The University of Chicago Press. 111
and then point towards practical policy measures, which he derived in the Cameralist tradition.
5.2 Health Related Aspects in Roscher's Thought
The Historic Method
There has indeed been doubt as to what Roscher's method and approach consist in. His work is very large, he systematized existing theories, but it is difficult to find his own theory. His own contribution has been looked for in the method, which he developed early on in his dissertation on the older Sophists.15
While Roscher disagreed with the Sophists in discussing their approach, he developed his own visions for the historical understanding of society. This discussion formed the basis for what became Roscher's main interest later, an analysis of different forms of state, as well as different functions of state (industrial policy, safety regulations, and other policies). Roscher was interested in the origin and development of the modern state. He wrote the standard work on comparative political constitutionalism, Vergleichende Rechtslehre describing major constitutional types. Roscher postulated an Aristotelian state that had to struggle against special interests of families, estates, corporations, communities, provinces, etc. In line with Aristotle, he held that any nation's economy begins with the family, not the individual, as the basic unit. In order to be functional, the Aristotelian state had to be reconstructed. Roscher believed that eventually democracy would degenerate and a proletarian class would form. 16
An example of a degenerating state is the Platonian state, where those being in power did not follow the law, and where state censorship was strong in all areas of life. Roscher described some of Platon's examples who, among other examples, used the following medical analogy in order to illustrate his state. According to Platon, one should not strive for the happiness of the single person, but for the happiness of the entire state. This would be similar to the human body, where health of the entire body is asked for, not just of a single limb. Platon often said that the head of state stands above the law and above the will and wishes of a population. He compared this to the
15 Leonhard Bauer, Hermann Rauchenschwandtner, Cornelius Zehetner. 2002. Edited, translated, and commented version. Wilhelm Roscher. Über die Spuren der historischen Lehre bei den älteren Sophisten (1838). (Wilhelm Roscher. On the Traces of the Historic Method in the Works of the Older Sophists (1838)). Marburg: Metropolis, pp. 43, 44. Moving from what he perceived as the less important to the more important, Roscher first discussed Kallikles' lesson of the right of the stronger, second, the lectures by Thasymachos and others, who elaborated on Potagoras' dictum that man is the measure of all things, and finally, he discussed the "uninterrupted flow of things." (1838, p. 50). 16 For an overview of Roscher's constitutional types of state from antiquity to modernity see Giouras, 1995, op. cit. , pp. 115. 112
helmsman of a ship who cannot ask for the seamen's opinions when deciding on the course of the ship; or to a physician who has to ignore the wishes of a patient when deciding on the treatment in order to restore health. 17 These examples illustrate that individual freedom was not valued highly in a Platonian state. In general, Roscher considered a rise in freedom as an indication for the cultural rise of a population.
The Organic Construction of Society
Roscher accepted Adam Smith as a forerunner of the historic method and tried to continue his tradition of moral philosophy, but unlike Smith, who based his views on The Theory of Moral Sentiments ,18 Roscher relied on Christian faith. In line with Smith, he asserted that immoral actions have negative economic results. From this assertion follows the definition of "true" needs.
... the acting person has to transform his needs into "true" needs, which means to make them compatible with the needs of other individuals. Roscher underlines the argument of Adam Smith, that the consideration of the needs of others belongs to the reflective process of our own needs, when he says that the surest way to satisfy our needs through circulation is to help others satisfy their own (1897, para. 11)[...]. It is worth noting, that a similar argument, relating to the negative economic results of the immoral action, was also to be used in the years to come by Schmoller. (Giouras, 1995, op. cit. , p. 111).
On the basis of this metaphysical foundation, Roscher developed his concept of an organic society. 19 He constructed
... the main propensities of economic action in a deductive way, through a supposed dualism of human nature, and not, as one would expect from an historical method, through a derivation from historical concepts. According to this dualistic conception every economy is based on the mental propensities of self-interest, which can degenerate into egoism, and of moral conscience (Gewissen ), whereas this last propensity is the "demand of the divine voice within us" (1897, para. 11). Through a combination of these two propensities the public spirit ( Gemeinsinn ) is born, which is looked on as the connection between the members of society and which unites "the great apparent contradictions" (1897, para. 11) like a bridge. Apart from these qualities the public spirit leads to a "higher, beautifully limbed organism" (1897, para. 12). (Giouras, 1995, op. cit. , p. 111).
17 Wilhelm Roscher. 2002. Über die Spuren der historischen Lehre bei den älteren Sophisten (1838). Marburg: Metropolis, p. 73. 18 Adam Smith. 1790. The Theory of Moral Sentiments . 1982 (6). D. D. Raphael and A. L. Macfie. Editors. Indianapolis: Libery Press. 19 Roscher's concept of the "organic society" served as a basis for Carl Menger, the founder of the Austrian School. Compare J. Krabbe, op. cit. , p. 159. 113
In line with earlier philosophical conceptions such as that of Herder, Roscher perceived of the national society as an organism in which harmony would prevail. Hereby he maintained that each nation has a unique construction characterized by its law, the state, the economy, religion, language, art, and science. Roscher concentrated on the first three factors of influence in order to explain the political economy of a nation. It was the task of the economist to describe the particular institutions of each nation and empirical regularities that are based on statistics in order to explain the causes of economic development and to show how to further social welfare of a nation. In explaining economic development, Roscher has identified the simultaneity and the mutuality of events as an important aspect. This, however, poses the problem of determining cause and effect, which Roscher tried to solve by positing an "organic life" as the first cause that would include the underlying religious belief. 20
Organic harmony requires that there is a harmonic relation between the three income classes, land rent, labor wage, and capital interest. A factor that could disturb harmony was labor, because the person who is selling labor becomes dependent of others. Roscher has demanded a just income distribution and higher wages for the workers in order to prevent a social uprising. In a Christian way, he wanted "love" to be the principle that governs social policy and that has to be extended towards the weaker members of society. Here, we find a major difference to Schmoller, who based social policy on the analysis of social institutions, instead of religion. (Giouras, 1995, op. cit. , p. 112).
Limits of the Division of Labor
Roscher followed Adam Smith in the proposal of division of labor. He predicted that productivity of a nation would rise due to the division of labor. With an increase of cultural development, a nation would need politicians and people would specialize to become businessmen, politicians, highly qualified professionals etc., but specialization of labor can be driven too far. If one-sidedness overwhelms in employment, the personality of a person will suffer, and, in the end, this will be to the disadvantage of the entire nation.
If a person has to perform a purely mechanistic activity, then this makes him a living tool, a slave, even if he or she is paid well, a role that does not befit an advanced culture. 21 Roscher considered one-sidedness in employment a danger to mental and moral health of workers. He suggested that machines should be developed to take over highly mechanistic tasks. There should be a basic education of people so that they
20 Perlman, Mark and McCann, Charles. 1998. The Pillars of Economic Understanding. Ideas and Traditions . Ann Arbor. The University of Michigan Press, p. 417. 21 Wilhelm Roscher. 1896. Geistliche Gedanken eines National-Oekonomen . Dresden: v. Zahn & Jaensch, p. 135. 114
would better be able to withstand the dangers of division of labor. He has observed an increase of the number of persons being mentally ill at any high cultural stage of a society. As a consequence of their illness, these people are unable to work and are likely to fall into poverty. 22 Roscher explained this phenomenon with the restlessness of life and interpreted it as a negative side effect of a division of labor driven too far.
Roscher considered it as rational for a culturally high-standing nation to take steps back in the division of labor in order to avoid mental and physical dangers. (Roscher, 1896, op. cit. , p. 135). As an alternative remedy of the one-sidedness of the division of labor, he suggested extended leisure time, which highly developed cultures allow for. (Roscher, 1896, op. cit. , p. 136). This way, high standing professionals could voluntarily take over public tasks in society and, for instance, perform work in charities. 23
Tolerance towards the mentally ill in society is an expression of individual freedom, which Roscher propagated. He reported the following incidence: When the Saxonian state wanted to found an institution for epileptics, von Bodelschwingh who was opposed to it, said "Let us keep the small amount of misery, we need it." 24 At that time, there was no cure available for epileptics. Von Bodelschwingh did not want the epileptics to be locked away, rather, he wanted society to develop so much tolerance that it will be possible to live with them. 25 How progressive his point of view was can be seen from the following quote: "Unfortunately, epileptics are all too frequently stigmatized and excluded from many activities of daily life. Outdated beliefs and misconceptions about epilepsy have only recently shown signs of lessening in the United States and other industrialized countries." 26 Roscher shared the sense of individual freedom that is expressed by von Bodelschwingh's remark.
22 For the causes of poverty compare paragraph 2 in Wilhelm Roscher. 1906 3. System der Armenpflege und Armenpolitik. (System of Poverty Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger, p. 4. 23 While Roscher was in support of charities in general, and also wanted the state to support private charities, he also made some critical remarks. In the case of the "Frauenverein of Elberfeld," where high-standing women in society performed charitable work, he criticized that their level of proficiency was not sufficient to perform the type of work they did, for instance in mental hospitals. Wilhelm Roscher, 1906 3. System der Armenpflege und Armenpolitik. (System of Poverty Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger, pp. 54-55. The conditions for charities to perform well have been worked out by his follower Karl Bücher (compare chapter 9). 24 In the original German quote this reads as follows: "Laßt uns doch das bißchen Elend, wir brauchen es!" Compare Wilhelm Roscher. 1894. System der Armenpflege und -politik. Stuttgart: Cotta, p. 145, footnote 5. 25 An example is the case of the German Democratic Republic, where, handicapped people were not allowed to become teachers. 26 Jerrold E. Levy. 1995 3. "Epilepsy." Kenneth F. Kiple, Editor. The Cambridge World History of Human Disease , pp. 713 - 718, p. 713 115
The Social Question : Poverty and Illness.
In his work, Roscher did not draw sharp lines between poverty and illness. Aspects of the larger Social Question are discussed in the History of Political Economy , 1874, ( op. cit. ), and Structure of the Economy , 1913, ( op. cit. ). In System of Poverty Care and Poverty Policy , 1906 3, ( op. cit. ) he more narrowly focused on issues of poverty and illness.
What was the cause of the workers' question? Roscher saw the question of the workers as a problem of population (1897, para. 178). A lack of self-control on the part of workers would lead to a multiplication of their numbers. In order to prevent that workers fall into poverty, he suggested that they use their savings and buy property, because this would invoke a certain sense of responsibility. However, in order to prevent mass poverty, Roscher suggested "only a thorough education and self-control of the lower classes can prevent mass poverty; so that they never get married light- mindedly, that they always provide for old age and illness." 27
The role of women Roscher saw predominantly in the house. While single women should be able to work, he suggested that mothers should stay at home. (1897, para. 250, and para. 207). He noted that a woman who works in a factory at too early an age later would not want to stay at home in order to keep a household. She would not like to learn the skills necessary to keep a house and raise children. (Giouras, p. 112) The family would most likely suffer from the mother's employment, and this could lead to the decay of the family, which he identified as a major contributor to poverty. The consequences of a lack of care giving skills were far-reaching. For instance, Roscher described mortality of babies not only as a consequence of bad living conditions, but it was also due to the inability to take proper care of babies, to insufficient and wrong nutrition (1906 3, op. cit. , p. 195). He also argued that young children needed supervision for their mental development. For health reasons, Roscher was opposed to the work of young children in factories, with one exception. If both parents worked at the factory, then the children should also do some light work at the factory after school instead of being left unattended at home. This example shows that in line with the Cameralist tradition, Roscher considered the mental component of health as important.
In his book on poverty and illness, Roscher noted that with an increase in culture, more and better care would publicly be provided and this had the consequence that more persons would apply for public care (1906 3, op. cit. , p. 6, footnote 7). To some degree, he saw the number of poor and ill persons as a statistical problem. He noted that before introducing houses for the deaf and dumb, one did not even know how many persons with that condition there were. He observed that recognition of poverty and
27 The quote reads in the original as follows: "Nur eine wahre Bildung und Vorsicht der niederen Klassen kann diesem Übel wirklich vorbeugen; so daß sie niemals leichtsinnig heiraten, immer für Alters- und Krankheitsfälle sparen."1906 3, op. cit. , p. 21. 116
illness would depend on the cultural stage of a society. A special education for a child being deaf and dumb is now considered a need for that child, but it was not recognized as a need at a primitive stage of culture.
Illness was a major cause of poverty. Roscher noted that among beggars, there were often mentally ill people who would also be addicted to substance abuse. They were predominantly a problem of the large cities, where they could make a lucrative income as compared to a factory worker. Roscher thought that poverty care would not be a remedy to begging; as beggars would always want to have more than what poverty care could offer them. He thought that begging has to be seen in connection to illness and addiction of people who lack the will and self-control to change. Thus, he concluded that only progress in psychological and psychiatric research could eventually bring the problem under control. Roscher wanted to extend psychiatric research to the vagrant population, jails, workers' colonies, etc. (1906 3, op. cit. , p. 16).
For those of the poor, who could not afford a physician, he suggested creating the public institution of a physician, who would provide free medical care (1906 3, op. cit. , p. 57). In the Cameralist tradition, he suggested to support and teach the poor and ill, and preferably in their home environment so that they could learn to help themselves. He preferred voluntary help, in particular if provided by members of the higher classes, but considered professional help as inevitable in the most severe cases (1906 3, op. cit. , p. 75).
5.3 Public Regulations
Roscher worked out specific suggestions taken from the Cameralist literature, notably Justi. Since he was also active in local, public, tax, and social policy, some of these suggestions have indeed been translated into specific policies adopted in the Kingdom of Saxony. 28 In this context, his History of Economics in Germany should not be overlooked as the most important source of inspiration for his policy proposals. 29
Quality Controls of Commodities
The basic concern was that producers take advantage of uninformed buyers and endanger their health. In the case of a faulty machine or other investment good, accidents were likely to result. Roscher showed that quality controls most likely were in
28 Reginald Hansen. 1997. "The Pure Historical Theory of Taxation." Jürgen Backhaus. Editor. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 289- 318. 29 Wilhelm Roscher. 1874. Geschichte der National-Oekonomik in Deutschland. (History of Economics in Germany). München: R. Oldenbourg. 117
the interest of the producers, if accidents could be prevented. He argued that public quality controls allowed producers to sell their commodities at higher prices than they could ask otherwise. This was so in particular, if the goods had to be exported. 30
Public controls by police will always be necessary if the health of the user is jeopardized by a sloppy quality of the commodity, and if the user cannot take own precautions by performing controls on his own. Then, it is most likely that the producers will gain from measures of public quality control, for instance in the case of ships, steam engines, and fire engines.31
For foodstuffs, Roscher advocated regulation requiring mandatory quality controls.
In particular detrimental to consumers are alterations of foodstuff. In the middle ages - a time that is not well known for its concerns for public health care - one has already recognized the need to publicly control foodstuffs. At many locations, legal regulations with respect to preparation, handling and alteration of foodstuff can be found. These regulations have more and more been forgotten. Despite the fact that there was no lack of regulations with respect to public medicine and hygiene, of which medical and sanitary police was in charge, an effective control of foodstuffs did not take place. Only since the middle of the 19th century such a regulation emerged in the culturally developed states which turned out to be very prolific. 32
30 Despite the fact that industry gained by quality controls, it did not have the organization to perform the quality control by itself. Roscher recommended quality control by an existing organization, the state. Wilhelm Roscher. 1913. System der Volkswirtschaft. Nationalökonomik des Gewerbfleißes und Handels . (The Structure of the Economy. Economics of Crafts and Trade). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger. Compare chapter eight on public regulation of industrial production, crafts, and trade, pp. 318-409. 31 The original German quote reads as follows: "Wo die Mangelhaftigkeit der Ware Leben oder Gesundheit der Benutzenden gefährden müßte, ohne daß sich diese mittels eigner Prüfung schützen können, da kann die Staatsschau immer polizeilich notwendig bleiben, und wird auch kaufmännisch den kontrollierten Produzenten meist sehr förderlich sein: wie bei Schiffen, Dampfmaschinen, Feuerwehren.(14)" Roscher, 1913, op. cit. , p. 320. 32 The original German quote reads as follows: "Besonders nachteilig für die Konsumenten sind die Verfälschungen der Nahrungsmittel; schon das Mittelalter, in dem sonst für die öffentliche Gesundheitspflege wenig genug geschah, hatte die Notwendigkeit erkannt, von Obrigkeits wegen hier einzuschreiten, und weist an vielen Orten eine Reihe genauer gesetzlicher Bestimmungen über Zubereitung, Verkauf und Fälschung der Lebensmittel auf.(10) Nach und nach gerieten diese Anordnungen aber in Vergessenheit und obwohl es im vorigen Jahrhundert an Medizinalverordnungen nich fehlte, die Medizinal- und Sanitätspolizei regelten, war von Kontrolle der Nahrungsmittel keine Rede.(11) Erst seit der Mitte des 19. Jahrhunderts ist dann in den Kulturstaaten eine Gesetzgebung zustande gekommen, die sich sehr 118
Roscher stood in the tradition of the Cameralists who by measures of hygiene and public medicine wanted to increase the health of the population. He advocated public regulations also with concern to measures of accident prevention in factories, unsafe working conditions, and excessive work hours for women and children, or unsatisfactory living conditions of workers.
Safety Regulations in Factories
Roscher advocated that the justified interests of those, who cannot protect themselves, have to be protected by law. For instance, if workers were malnourished or exhausted due to bad working conditions, he recommended that the state should intervene. He argued that this would also be in the interest of the factory owners.
Under the equalizing influence of free competition, it should be in the interest of all culturally high-standing factory owners to prevent existing or attempted over excessively strenuous working conditions and malnutrition of workers by public measures. 33
Healthy conditions of working in factories lead Roscher even to consider protective tariffs. The line of argument is relevant in today's times of globalization. It reads as follows. Efforts at maintaining healthy working conditions in one factory can be undercut by less scrupulous factory owners operating in the same products market. In the extreme, this would lead to the departure of the factory with the healthy conditions and leave the market only with firms operating with working conditions involving health risks. This calls for state regulation, since self-regulation under these circumstances is unlikely.
Looking at international markets, if regulation in the form of international treaties cannot be accomplished, protective tariffs against products competing with home products for which the previous scenario would likewise apply can be invoked as a measure of last resort. The option is treacherous, since it may invite retaliatory tariffs affecting totally unrelated home industries. Note that the argument does not involve working and factory conditions abroad. He is not talking about Chinese slave labor, textile sweatshops in New York, or shrimp processing in the harbor of Rotterdam. 34 He is concerned with local working conditions with respect of the health conditions of workers facing international competition.
bewährt.(12)" Roscher, 1913, op. cit. , p. 328. 33 The original German quote reads as follows: "Bei dem nivellierenden Einflusse des freien Mitwerbens müssen alle sittlich guten Fabrikanten selbst wünschen, daß etwa vorhandene oder versuchte Überanstrengung und Unterernährung der Arbeiter staatlich bekämpft werden." Roscher, 1913, op. cit. , p. 333. 34 Today, the arguments often run the other way, as politicians are concerned with working conditions abroad. 119
The larger a factory, and the fewer the number of close competitors, the more so become workers dependent and the less likely they will be able to agree on a free labor contract. Sometimes, children are employed, who face the exploitation of both, parents and factory owners. Roscher advocated for encompassing public regulations that would prevent exploitation of both, youth and adult employees. He thought that the institution of worker councils was not able to prevent exploitation. He observed that entrepreneurs were reluctant to accept them and that workers showed indifference and distrust towards worker councils. Under these circumstances, he concluded that workers councils are most useful if they form at the same time the board of a company- based health insurance (p. 336).
In order to enforce a safe environment in factories, Roscher propagated the position of a factory inspector who visits factories and informs the state about the needs of factory workers. He must be allowed to gain entry to the factory at all times, while strongly keeping business secrets. A factory inspector must be impartial, his task is to make unsafe conditions public, but leave prosecution to police. Roscher also noted that the institution of factory inspector requires the registration of all factories and of their workers. The ideal would be a worldwide system of factory inspections based on international agreements, an ideal that according to Roscher was still far away (p. 339). Several countries, however, already had factory inspectors. Roscher counted 543 public officials in Germany, 268 in Russia, and 200 in England. Their tasks varied slightly in the different countries (p. 341).
Roscher warned of the effects of strong worker security measures in one country, if other countries did not have such protections. A country without or with limited measures of security could in times of expansion during a business cycle fully take advantage of its capacities, while the other country would have a restriction and thus face a disadvantage. To a limited degree and in specific areas, Roscher saw a potential of international agreements to solve those conflicts. As an example, he cited the international Worker Security Conference in Bern of 1905, where several countries signed an agreement prohibiting night labor for women in industry, as well as prohibiting the use of a toxic, white phosphor, in the production of matches (p. 342). Roscher attached an important role to statistics. National labor offices should gather the data necessary to make an evaluation of the situation in a country (para. 60 b). From specific labor secretaries, people should be able to obtain information with respect to their rights in factories and insurance claims (para. 60 c).
The regulation for children employed in factories not only should prevent hardship at work, but also secure their education at school, and night labor should entirely be prohibited. Roscher saw a case for moderate child labor, but distinguished between children below and above the age of sixteen. For the latter, he recommended that they should perform some kind of work, as this would be better for their physical and mental health and for society in general (para. 61). Apprenticeships of the youth need particular attention according to Roscher, as many of the apprentices would leave their contracts for a position requiring little qualification, but offering a higher piecemeal wage (para. 62). He recommended that apprentices working in particular health- 120
damaging industry such as the glass- or paint industry should receive instruction in a building separate from the factory.
With respect to female work, Roscher noted that it is particularly important that a female worker's health is not endangered and that the family life is not destroyed by a mother's employment as this would have negative effects on children (para. 61 a). German legislation at the time provided for maternity leave, a maximum workday of eleven hours, longer breaks for factory workers who have to take care of an own household, and allowed females to work only in those factories that do not expose them to extraordinary dangers. For instance, work in quarries was restricted to females.
Roscher observed a tendency towards a shorter workday for both, male and female workers. From an unrestricted workday, to a 12 or 13-hour day, he saw the 8-hour workday as a goal not so far in the future (para. 61 b). He thought that an improved technology in the future could help to introduce a shorter workday and bring about the benefits associated with it. According to English experiences with a shorter workday, the benefits consisted in higher productivity of labor, more regularity, increased diligence, and better health states of the workers (p. 364). Roscher also wanted employees to observe Sundays and holidays, but noted that extreme poverty among workers and some technology in industry would require work on Sundays. From physicians' side, he quoted demands that in particular female office workers should get a long rest on Sundays, as tuberculosis and nervous disorders were on the rise (p. 367).
Every entrepreneur owning a factory of craft shop has to take safety precautions such as proper ventilation, security measures for machinery, or protective clothing and carry the costs for these measures. Roscher considered it as even more important to also have rules that ensure moral standards in a factory. In case of an accident happening because of unsafe circumstances, the employer would have to reimburse the worker and his dependants. If the accident was caused by incautious behavior of the worker, then public poverty care would have to take over the case. In order to prevent that workers would fall onto public poverty care, Roscher mentioned the possibility that workers could buy accident insurance themselves, yet he considered it an unlikely outcome. He therefore recommended that the factory owner would buy accident insurance. Then, the average costs of the accident insurance and of the other safety precautions would be part of the production costs and could be shifted onto the consumer (para. 63, p. 380). Roscher himself did not discuss the effects of such a shift of insurance costs onto consumers; however, he referred the reader to the further discussion in Schmoller's Jahrbuch .35
35 Compare Schmoller's Jahrbuch , 1881, on financing health insurance, accident insurance, and insurance for widows and invalids. In chapter 6, we will turn to this discussion in more detail. Wilhelm Roscher. 1906 3. System der Armenpflege und Armenpolitik. (System of Poverty Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger, p. 349, footnote 8. 121
If an accident happened, then this did most often not lead to a claim. Roscher gave the example of the factory director at Hanover, who reported in 1870 a total of about 1700 accidents, but only in 116 cases accident insurance was claimed (1906 3, op. cit. , p. 345).
Occupational Diseases
Roscher paid attention to occupational diseases such as in mining. (Roscher, 1913, op. cit. , Paragr. 95, p. 607). There was a higher danger of accidents in mining than in other occupations. The hardship of working in a mine, such as working in a lying position, strong temperature changes, or dust development, forced miners to quit working before they reached the age of sixty. Roscher concluded that only the healthy body of a male adult could withstand the hardships of mining. He advocated the prohibition of women and child labor in mining. The particular bad circumstances of women and youth workers as described by Engels' Situation of the Working Classes in England he thought were due to entrepreneurs' greediness for profit.
Roscher demanded that the personality of a miner had to be different from that of other workers. (p. 608) He had to be more steady and thoughtful in order to withstand the particular dangers of mining. Here, Roscher pointed towards an important point in health economics. Selection of employees with a lower risk to contract an occupational disease can reduce the occurrence of occupational diseases. If it is well-known that smokers are more likely to contract lung cancer in a dusty work environment, then preferably non-smokers should be selected to work in that kind of environment.
The entrepreneur has to take precautions in order to protect the workers. Roscher thought that beyond the regulations in the Prussian Mining Law, inspectors should be sent into the mines in order to determine the state of safety conditions and they should make their results public (p. 610).
Societies of miners, which can be traced back until 1300 (p. 611), had in Roscher's time mostly the role of insurance carrier for the sick and the elderly, and for those who had an accident. They offered free treatment and medicine, paid for a recovery period of up to eight weeks, offered an invalidity pension, a widows' pension, provided money to children and orphans, and paid for the funeral. Membership was compulsory for miners as well as mine owners. Membership fees of both, miners and mine owners, finance the insurance.
5.4 Summary and Conclusions
Roscher has emphasized that economic phenomena are perceived differently at various cultural stages. An example is illness where we now perceive needs, for instance the need of special education for handicapped children, which have not been 122
recognized at lower cultural stages. The historic method leads to insights of the development of illness and its needs depending on the cultural stage. Here, Roscher formulated an argument that shows the more modern debate of cost-containment in health care in a different light. Costs in the health care sector are rising, and the political debate often centers about the question how costs can be contained in the health care sector. While this is an important point, for instance if we think of how to remedy inefficiencies that are due to monopolist structures, it is often overlooked that development also brings about improvement in the performance of health care. Not only costs are rising, performance is rising as well. New needs occur that have not been recognized before.
Roscher was in favor of state regulations in order to ensure safe products and a safe working environment. He recommended public safety inspections to enforce these regulations. 36 Roscher considered Engels' early criticism of the misery in factories an exaggeration. He recognized the problems associated with factory work and thought that the worst social consequences were due to the factory system not yet fully developed. With a system of inspection, he wanted to control factory legislation and its effects. 37 In a comparison with other German states, the number of factory factory inspectors was relatively strongest in Saxony. 38
He also recommended accident insurance to be provided by the factory owners, and the costs to be shifted onto the consumers. In this context, he did not make clear the effects of safety legislation on the market. He described that factory inspectors reported more accidents than were actually claimed. Some factory owners might need public assistance in order to survive. In the context of his analysis of crises [Absatzkrisen],
36 Bismarck was opposed to the draft of the law on the education of factory inspectors in 1877. By increasing the number of civil servants, he feared that requiring companies to perform more administrative work could slow them down and hinder the growth of the economy. John Conway O'Brien. 1987. "Schmoller's Briefe on Otto Fürst von Bismarck." Paper presented at the 14th Annual Meeting of the History of Economics Society . June 20-22, 1987. Harvard University School of Business, Cambridge, Massachusetts, p. 28. Translation of a letter written by Schmoller on September 6, 1898, St. Blasien. 37 Bertram Schefold, 1994. "Wilhelm Roschers `Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte." (Wilhelm Roschers `Views of the Economy from the Historic Viewpoint.') Streissler, Erich W., Rosner, Peter, Baltzarek, Franz, and Milford, Karl. Editors. Wilhelm Roscher und seine Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte . Düsseldorf: Verlag Wirtschaft und Finanzen GmbH, pp. 5-36, p. 20. 38 Compare Alfred Weber, p. 44, footnote 1. This shows how strong Roscher's practical influence was in Saxony and beyond. According to Alfred Weber, at that time it was the most important task for worker security to increase the number of inspectors. Compare Alfred Weber. 1897. "Die Entwickelung der deutschen Arbeiterschutzgesetzgebung seit 1890." (Development of German Worker Security Legislation since 1890.) Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, XXI, 4, pp. 1-50 (1145-93). 123
Roscher clearly stated the limits of state intervention. State intervention should not go so far as to replace the market.
A far-reaching guardianship of the state over private actors (emphasis in the original) is not a good measure to prevent crises. In reality, the state would never be able to really supervise production and consumption. It would intervene only by accident here or there; and public help for one private actor would constitute a disadvantage for another private actor (who has to pay taxes as well) leading to artificial overproduction of some goods and artificial underproduction of others; this would in many ways distort the way how supply and counteroffer naturally meet each other. 39
The following evaluation by Senn shows Roscher's place in relationship to Wolff.
My guess is that there is a distinct possibility that many of Roscher's ideas about the role of history in economics could be read as in opposition to Wolff. Roscher made the object of political economy not the establishment of the best possible state of things, but rather the description of the actual state at which the economy has arrived through continual development. Is it possible that he consciously tried to move German economics away from the path of Wolff? Of the two crucial questions, `What is?' (positive economics) and `What ought to be?' (normative economics), Roscher wanted to answer only the former. In fact Roscher did radically alter the approach to economics in Germany with the development of the historical school of economics. 40
In listing single and unrelated problems, Roscher provided the arguments, but not yet the analysis. In emphasizing some aspects, he neglected others, for instance "the well- known book of Wilhelm Roscher System der Armenpflege und Armenpolitik (published for the first time in 1894) refers in only one sentence to the obligatory insurance for surviving dependents." 41 He did not connect the different elements of social security
39 The original German quote reads as follows: "Eine weitgehende Staatsvormundschaft über die Privatwirte ist kein gutes Vorbeugungsmittel gegen Krisen. So weit, daß sie wirklich Produktion und Konsumption überwachte und leitete, kann sie im Ernste doch nie gehen. Sie würde also nur zufällig hier und dort eingreifen; und weil jede positive Gunst des Staates für den einen Privatwirt eine Ungunst für irgendeinen anderen (doch auch steuerpflichtigen) enthält, so würden einige Productionen künstlich übertrieben, andere künstlich gehemmt werden, und damit das natürliche Sichbegegnen von Angebot und Gegenwert mannigfache Störung erleiden." Wilhelm Roscher, 1913, op. cit., para. 88, p. 578. 40 Peter R. Senn. 1997. "What is the Place of Christian Wolff in the History of the Social Sciences?" European Journal of Law and Economics . 4, pp. 147-232, endnote 40, p. 214. As noted on p. 180, Senn based his comments mainly on Roscher's Geschichte der National-Oekonomik in Deutschland , (pp. 344), where Roscher paid attention to Wolff. 41 Winfried Schmähl. 1997. "Avoiding Poverty in Old Age by an Obligatory 124
such as old-age insurance and health insurance. It was up to Schmoller to systematically connect it and provide a thorough analysis of an insurance system. Similarly, while reporting on charities and reciprocal help, it was up to Bücher, his successor at Leipzig, to work out this aspect (compare chapter eight).
References
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Backhaus, Jürgen. Guest Editor. 1995. Wilhelm Roscher and the "Historical Method." Journal of Economic Studies. Vol. 22, Nrs. 3/4/5.
Backhaus, Jürgen. 1995. "Introduction: Wilhelm Roscher (1817-1894) - a centenary reappraisal." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 4-15.
Bauer, Leonhard, Rauchenschwandtner, Hermann, and Zehetner, Cornelius. 2002. Edited, translated, and commented version. Wilhelm Roscher. Über die Spuren der historischen Lehre bei den älteren Sophisten. (1838). (Wilhelm Roscher. On the Traces of the Historic Method in the Works of the Older Sophists. 1838.) Marburg: Metropolis.
Buchanan, James. 1993. 5 The Limits of Liberty: between Anarchy and Leviathan. MacGill: The University of Chicago Press.
Giouras, Thanasis. 1995. "Wilhelm Roscher: the "historical method" in the social sciences: critical observations for a contemporary evaluation." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 106-126.
Hanel, Johannes. 1995. "Paracelsus' Social Writings from a Modern Social Science Point of View." International Review of Comparative Public Policy. Vol. 6, pp. 3-128.
Hudson, Michael. 1995. "Roscher's Victorian views on financial development." Journal of Economic Studies . Vol. 22, No. 3/4/5, pp. 187-208.
Kenessey, Zoltan. 1994. "Economic Stages: Roscher, the Historical School, and Others." A Note. Conference Volume. Sixth Annual Heilbronn Symposion in Economics and the Social Sciences. June 23-26, 1994. Wilhelm Roscher (1817-1894). A Centenary Reappraisal .
Contribution-Financed Minimum Insurance." Jürgen Backhaus. Editor. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 15-33, p. 27. 125
Krabbe, Jacob J. 1995. "Roscher's organistic legacy." Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 159-170.
Levy, Jerrold E. 1995 3. "Epilepsy." Kenneth F. Kiple, Editor. The Cambridge World History of Human Disease , pp. 713 - 718, p. 713
O'Brien, John Conway. 1987. "Schmoller's Briefe on Otto Fürst von Bismarck." Paper presented at the 14th Annual Meeting of the History of Economics Society . June 20-22, 1987. Harvard University School of Business, Cambridge, Massachusetts.
Perlman, Mark and McCann, Charles. 1998. The Pillars of Economic Understanding . Ann Arbor. The University of Michigan Press.
Roscher, Wilhelm. 1874. Geschichte der National-Oekonomik in Deutschland. (History of Political Economy in Germany). München: R. Oldenbourg.
Roscher, Wilhelm. 1896. Geistliche Gedanken eines National-Oekonomen . (Religious Thoughts of an Economist). Dresden: v. Zahn & Jaensch.
Roscher, Wilhelm. 1906 3. System der Armenpflege und Armenpolitik. (System of Poverty Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger.
Roscher, Wilhelm. 1913. System der Volkswirtschaft. Nationalökonomik des Gewerbfleißes und Handels . (The Structure of the Economy. Economics of Crafts and Trade). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger.
"Roscher, Wilhelm Georg Friedrich." 1901 (2). Handwörterbuch der Staatswissenschaften. Jena: Gustav Fischer, pp. 463-465.
Schefold, Bertram. 1994. "Wilhelm Roschers `Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte." (Wilhelm Roschers `Views of the Economy from the Historic Viewpoint.') Streissler, Erich W., Rosner, Peter, Baltzarek, Franz, and Milford, Karl. Editors. Wilhelm Roscher und seine Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte . Düsseldorf: Verlag Wirtschaft und Finanzen GmbH, pp. 5-36.
Schmähl, Winfried. 1997. "Avoiding Poverty in Old Age by an Obligatory Contribution- Financed Minimum Insurance." Jürgen Backhaus. Editor. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 15-33.
Schmoller, Gustav. 1897. Wechselnde Theorien und feststehende Wahrheiten im Gebiete der Staats- und Socialwissenschaften und die heutige deutsche Volkswirtschaftslehre. (Changing Theories). Inaugural lecture printed by Julius Becker.
Senn, Peter R. 1995. "Why had Roscher so much influence in the USA compared with 126
the UK?" Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 53-105, p. 64.
Senn, Peter R. 1997. "What is the Place of Christian Wolff in the History of the Social Sciences?" European Journal of Law and Economics . 4, pp. 147-232, fn 40, p. 214.
Schumpeter, Joseph A. 1954. History of Economic Analysis. New York: Oxford University Press.
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Weber, Alfred. 1897. "Die Entwickelung der deutschen Arbeiterschutzgesetzgebung seit 1890." (Development of German Worker Security Legislation since 1890.) Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, XXI, 4, pp. 1-50 (1145-93).
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128
Chapter 6
Adolph Wagner (1835-1917):
The Increasing Role of the State in Health Care
Contents
6.1 Introduction
6.2 Wagner's Law
6.3 An Interpretation of Wagner's Law as an Evolutionary Law
6.4 Further Developments of Wagner's Law
6.5 Summary and Conclusions
This chapter is based on my publication "Adolph Wagner's contributions to public health economics." 2003. Evolutionary Economic Thought . Editor. Jürgen G. Backhaus. Cheltenham, UK: Edward Elgar, pp. 125-135.
129
6.1 Introduction
Adolph Wagner (1835-1917), the public finance theorist and advocate, was interested in the limits of the state as a part of the economy. His prediction of the likely long-term development of the tasks of the state is known as Wagner's Law . He showed that with an advance in the culture of a society the tasks of the state will grow in the long run. Wagner has formulated the conditions under which the state can and should intervene in the economic process and thus created a basis for legislation. He foresaw a role of the state with respect to health care, which will be the focus of this chapter. In the introduction, Wagner's work will be put in context by providing a short biography. Section 6.2 focuses on Wagner's Law , and an application to health care follows in the next section (6.3). When Wagner formulated his law, capital markets had not yet emerged and institutions were not fully developed. In order to show the relevance of Wagner's Law today, aspects of both, the presence of capital markets and modern institutions, will be discussed in section 6.3 and 6.4. The chapter ends with a summary and conclusions (6.5).
Wagner developed his law, when he was a professor at the Commercial Academy at Vienna (1858-1863), where he devoted himself to the theory of public finance. Before he went to Vienna, he had studied jurisprudence and political science at the Universities of Göttingen and Heidelberg. From Austria, Wagner proceeded to the City College of Commerce in Hamburg. Later, he held chairs at the universities of Dorpat, Freiburg and, from 1870 until his death in 1917, Wagner was Professor in Berlin. His major works are Grundlegung 1 and Finanzwissenschaft .2 Wagner was one of the co-founders of the Verein für Socialpolitik , but became frustrated and discontinued his activities in the Verein . On social policy, Wagner and Schmoller often had controversies. While Wagner was more motivated by religious- philosophical considerations, Schmoller based his opinions strongly on empirical facts. Adolph Wagner did not want to be associated with the Historical School. Instead, he felt to be close to Carl Menger. 3 Wagner was a member of the Royal Statistical Bureau of Prussia. From 1882 to 1885 he was a member of the Prussian Lower House for the German Conservative Party.
1 The Grundlegung (Foundations) is Wagner's own work and part of his Lehr- und Handbuch der politischen Oekonomie (Text- and Handbook of Political Economy) (1892-94) which grew out of a revision of Rau's textbook on political economy. Leipzig und Heidelberg. C.F. Winter'sche Verlagshandlung. 2 See his Finanzwissenschaft (The Science of Public Finance), 1877-1901. Published in four parts. For the connection to Rau compare Finanzwissenschaft . Part I, 1883 (3), Leipzig und Heidelberg. C.F. Winter'sche Verlagshandlung, p. vii. 3 Reginald Hansen, 1997. "The Pure Historical Theory of Taxation." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered . Editor: Jürgen Backhaus. Marburg: Metropolis, pp. 289-318, p. 292. 130
Although Wagner did not actively participate in the research and debates with respect to social security and health, which took place in the Verein für Socialpolitik , he was not without political influence in this area. For instance, he was one of the first to be consulted about introducing a system of social security. In November 1871, shortly after the establishment of the German Empire, Wagner was invited as a social policy advocate and scholar to a meeting in the Prussian Ministry of Commerce, in which representatives from commerce, industry, and the landed interests participated. He pointed towards the necessity of a social enquête, tax reform, and the establishment of supervision of factory inspections. 4 At the meeting in the Prussian Ministry of Commerce, Wagner was considered one of the few representatives of the conservative viewpoint. Among the other participants were captains of industry or members of parliament, who were considered to agree with the doctrines of the Manchester School.
According to the Manchester School the state should only take a position as a night watchman. This expression was coined by Ferdinand Lassalle who was, like Wagner himself, an opponent of the pure free market economy as proposed by the Manchester School. 5 Wagner disagreed with the view of the Manchester School. Wagner introduced the state as an actor providing the infrastructure for the economy, for instance by enforcing laws. He held that the state becomes the basis for the economy. The state takes part in the economy itself by producing goods and services in addition to those produced by the free market economy. 6 Thereby, the state forces the competition to follow its lead. For example, a state mine introduces safety measures and produces the information necessary for the mining authority to regulate the private mines. A state railroad develops guidelines with respect to safety and through the experience gained in the operation of the railroad generates the information necessary to regulate all railroads, public and private. In a pure market economy, regulation is stifled, since the state lacks the information necessary for regulation. The state creates a legal infrastructure in order to enhance cultural and economic development. (This might lead to a more equitable distribution).
As a Socialist of the Chair Wagner wanted to promote social freedom, thereby overcome class formation, and hence prevent class struggle. Essential elements in
4 See the essay by Rolf Rieß, 1997, "Worker Security and the Prussian Bureaucracy. A Meeting in the Prussian Ministry of Commerce." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered . Editor: Jürgen Backhaus. Marburg: Metropolis, pp. 143-171, p. 145. Rieß quoted Gerhard Wittrock. 1939. Die Kathedersozialisten bis zur Eisenacher Versammlung 1872 . (The Chair Socialists). Berlin, pp. 59. 5 Adolph Wagner. 1901. (2) "Staat in nationalökonomischer Hinsicht." (The State in Economic Perspective). Handwörterbuch der Staatswissenschaften . Jena: Verlag Gustav Fischer, pp. 940 - 951; in particular p. 942. 6 Wagner agreed with Roscher and Dietzel, who saw the state as an economic good (including services) and also capital good, but he went beyond their view. Adolph Wagner, 1901, op. cit. , p. 944. 131
the strive of the Socialists of the Chair for social freedom were the freedom of organization, the right of unionization, and the freedom of uninsurable risks such as the loss of the ability to work due to a labor-related accident, the loss of the major breadwinner, and the loss of the ability to work due to old age. 7 In his efforts to create the possibility for social progress and elevation, Wagner was concerned with the proper limits of the state. He proposed that people who receive goods and services from the state also pay for them through small fees and moderate taxes. He was aware of the difficulty of determining the value, costs, and quantity of goods and services provided by the state. As a solution, he proposed participation of the citizen in the public decision making process. (1901, op. cit. , p. 944).
After having set the stage in the introduction with a short biography and context of Wagner's work, we will now turn to those aspects of his work, which are relevant to health economics. Wagner's Law , a forecast for the long-term behavior of the state, is embedded in the analysis of the Austrian state budget and will be discussed in section 6.2. In section 6.3, Wagner's Law will be applied to explain the growing influence of the state in health care. In the next section, the focus will be on one aspect of Wagner's analysis, namely that capital (of all kinds) will become more important in the future. This is also the starting point for the Baumol-Bowen hypothesis which focuses on production costs in order to explain the rise of real health care costs (section 6.4). The chapter ends with a summary and conclusions (section 6.5).
5.2 Wagner's Law
In the context of public finance, Wagner used the notion of the state in the sense of subsidiarity. 8 In Wagner's view, the state is a much more complex concept than the perception of today. In a modern conception, the state consists of different levels of government ranging from national to local, each with its own tasks and
7 Modern European laws of social insurance include these three forms of uninsurable risks. Jürgen Backhaus and Gerrit Meijer. 2001. "City and Country: Lessons from European Economic Thought." The American Journal of Economics and Sociology . 60/1, pp. 59-77, p. 65. 8 For a deeper economic analysis of the notion of the state and the philosophical background see Wagner's essay "Der Staat." (The State). 1901 (2), op. cit. , in particular pp. 946 - 951. On the subsidiarity principle in a history of economic thought perspective, see Jürgen Backhaus, 1998, "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." Christian Wolff, Gesammelte Werke, II. ABT. Bd. 45, Christian Wolff and Law & Economics. Georg Olms: Hildesheim, pp. 19-36. See also Manfred Prisching. 1997. "The Preserving and Reforming State. Schmoller's and Wagner's Model of the State." Jürgen Backhaus. Editor. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered . Marburg: Metropolis, pp. 173- 201. 132
competences. 9 According to Wagner, the state not only consists of government, but also includes civil society, tradition, law, customs, language, and culture. Tasks may be handled in any one or several subsets of society, and it is the government's responsibility to ensure that specific tasks such as health policy are performed. It is not the government's responsibility to do this all by itself.
In 1863, Wagner formulated his law of the expansion of state functions over time. He predicted that with an increase in the cultural and technical development and general sophistication and interconnectedness of a complex society the state would become more influential.
On the whole, the realm of the state's activities has become ever more extensive, as the concept of the state developed, as people achieved higher and higher levels of civilization and culture, and the more demands were consequently addressed to the state. This has also led to a continuous increase in the required state revenues, an increase which was generally even higher relative to the increase of the extent of state activity. The cause for this relative difference lies in the means employed by the state: these have become ever more complex, comprehensive and costly as one and the same need required an ever more perfect, higher and refined way of being satisfied. Consider by way of example the educational system! The phenomenon has the character and importance of a "law" in political economy, the requirements of the state are constantly rising as people progress. 10
In 1892, Wagner represented a more refined formulation of his law. He distinguished
9 Compare for instance the textbook by David N. Hyman. 1999 (6). Public Finance. A Contemporary Application of Theory to Policy . Fort Worth: Harcourt Brace College Publishers. 10 The original quote reads as follows: "Im ganzen ist der Bereich der Staatsthätigkeit immer ausgedehnter geworden, je mehr sich die Staatsidee entwickelte, eine je höhere Stufe der Civilisation und Cultur ein Volk erreichte, je mehr neue Anforderungen in Folge dessen an den Staat gestellt wurden. Damit ist dann aber auch die Größe des Staatsbedarfes fortwährend gewachsen, und zwar relativ meist noch stärker als der Bereich der Staatsthätigkeit, weil das System der zur Erreichung der Staatszwecke dienenden Mittel complizirter, umfassender, kostspieliger wurde und ein und dasselbe Bedürfnis auf eine immer vollkommenere, höhere, feinere Weise seine Befriedigung verlangte. Welcher Fortschritt ist z.B. in dieser Beziehung im Unterrichtswesen eingetreten! Die Erscheinung hat den Charakter und die Bedeutung eines "Gesetzes" im Leben des Staates: der Staatsbedarf ist bei fortschreitenden Völkern in regelmässiger Vermehrung begriffen." Adolph Wagner. 1863. Die Ordnung des österreichischen Staatshaushaltes . (The System of the Austrian State Budget). Editors: Androsch, Hannes, Haschek, Helmut, and Vranitzky, Franz with a preface by Knapp, Horst. Wien: Publisher Christian Brandstätter, p. 31. (English translation by Jürgen Backhaus). In note 3, p. 296, Wagner referred to a textbook by Umpfenbach as the original source of the law. 133
between two bundles of public functions, the sphere of law and power, and the sphere of culture and welfare. 11 In the sphere of law and power the tasks of the state might rise, if government takes over activities from the private sector in order to introduce a higher degree of professionalization. Due to the development of the economy, the legal circumstances might become too complicated and require further regulation. In the sphere of culture and welfare, the functions of the state might increase, because certain production activities are taken over by the state such as measures of infrastructure, the implementation of insurance systems, or monopolies. New needs might arise that have to be fulfilled by a better or more refined supplier, or services have to be fulfilled where the central perspective is not profit maximization, for instance in education, traffic, health care, or communal services. Rising collective and cultural needs will increase state functions, if the quality of the services provided by the state improves.
Wagner was concerned about the impact of the development, which we today call Wagner's Law on the status of civil liberty. In his article on "The State" of 1901 ( op. cit. , p. 946), he distinguished between primarily indirect and primarily direct state services in the sphere of culture and welfare. He expected that each type of service would have a different effect on the economy. 12 Primarily indirect state services, for instance measures to facilitate legal complications or to improve infrastructure, would allow private and small political entities to remain independent and thus facilitate the free market exchange, while primarily direct state services, which are often required for technical reasons, would lead to centralization. Wagner argued that provision through primarily direct state services will occur when in relation to marginal costs average costs will be very high. This case of increasing returns to scale, however, is important from the point of view of civil liberties, too. Because of high average costs, a central provider of a service or product can realize economies of scale and economies of scope. 13 Therefore, the central provider faces lower production costs
11 Compare his more refined formulation of 1892. Adolph Wagner. Grundlegung . (Foundations), a part of Lehr- und Handbuch der politischen Oekonomie (Text- and Handbook of Political Economy). Leipzig und Heidelberg. C.F. Winter'sche Verlagshandlung. Paragraph 358. 12 Wagner was not the only one thinking along these lines. Two other examples are the following: in the long run, federal programs tend to lead to agglomeration. This is one reason why people move from the countryside to the city. Federal programs tend to benefit the cities, so that it becomes cheaper to live there. This effect is known as Brecht's Law . Another law, Popitz' Law , states that in the case of federal states, one can find a long-run tendency towards centralization in the development of the shares of the central state. The expenditures of the single states and the cities become less important as part of all public expenditures. Compare Walter Wittmann. 1970. Einführung in die Finanzwissenschaft . (Introduction to Public Finance). Stuttgart: Fischer, pp. 13- 16. 13 When costs can be reduced by producing more of a good or service, then economies of scale are present. When a broader range of goods or services leads to cost reductions, then we speak of economies of scope. As the central 134
than smaller entities, but may have difficulties in absorbing the relevant information from the base. Wagner, an advocate of minimum state influence, preferred indirect to direct state influence, as the former better would leave civil liberties intact.
Due to a process of steady refinement, Wagner concluded that capital, both material and human capital, will play a more important role in a developed economy, thus, over time, the principle of prevention would become more important than the principle of repression. (1892. op. cit. Paragraph 71 ff.).
The principle of prevention with extensive institutions to prevent legal disturbances and other evils (for instance in the area of the health care system)... will more and more be applied, so that the system of cure will become less important... 14
Wagner has applied this principle to health care. Health care, in Wagner's view, encompassed the progress in natural sciences leading towards better health, healthy animals and plants, and the environment in general, which is crucial to human health. Wagner expected the state to implement the insights and new knowledge developed through natural sciences.
The conditions leading to health or sickness of people, animals, and plants involve light, air, water, food, housing etc., as well as infective agents and means of precaution. The progress of the natural sciences with respect to these conditions of health and sickness, among other factors, has in many respects an influence that the public, the state tasks will continue to expand in the interest of everyone in order to ensure welfare conditions of this kind. 15
provider, the best service provider for the task defined as a state task is meant. For instance for canals, postal services, or electricity, the national level would most likely be appropriate, for more local tasks such as garbage disposal a regional or city level would be chosen. 14 The original quote reads as follows: "Das Präventivprinzip mit umfassenden Einrichtungen zur Prävention von Rechtsstörungen und anderen Uebeln (so auf dem Gebiete des Gesundheitswesens), ... wird immer mehr zur Durchführung gebracht, so daß das Repressivsystem zurücktritt,..." Adolph Wagner, 1901, op. cit. , p. 749. 15 In the original, the quote reads as follows: "U. a. sind die naturwissenschaftlichen Fortschritte in der Erkenntnis der Bedingungen von Gesundheit und Krankheit der Menschen, der Tiere, der Pflanzen in betreff von Licht, Luft, Wasser, Nahrungsmitteln, Wohnung usw., Krankheitserregern, Vorkehrungsmitteln dabei in vielen dieser Beziehungen von Einfluß darauf, daß die öffentlichen, die Staatstätigkeiten sich im Gesamtinteresse immer weiter ausdehnen, um Wohlfahrtsbedingungen dieser Art zu verbürgen." Adolph Wagner. 1911. "II. Staat in nationalökonomischer Hinsicht." (The State in Economic Perspective). Handwörterbuch der Staatswissenschaften . Jena: Verlag Gustav Fischer, pp. 727-739, in particular p. 736. 135
Better prevention will be produced by more complex organizations in the economy. Wagner thought that in the modern state public services would be delivered in a different way with capital and human knowledge becoming more important. Large institutions and organizations would emerge requiring highly qualified labor. Well- educated civil servants would be employed in complicated organizational structures in such areas as law, defense, and health care. (1911, op. cit. , p. 737). A high level of financial flow is necessary in order to finance these measures. As consequences of more preventive measures of the state, Wagner predicted an increase in costs, as well as a more even distribution of benefits and costs in the form of taxes in the long run. He considered a more equal distribution as a favorable outcome of the preventive system.
Could civil servants fulfill the requirements posed by a modern society? Wagner compared the performance of public and private employees and found that civil servants were hampered in their work by unavoidable state controls and lacked the incentive to make profits, as they did not have a share in the outcome. Wagner considered continuous profitability a measure of efficiency for private businesses. However, the state could offer other than monetary rewards to civil servants such as honors (ranks, titles and decorations) and give them a better standing through greater security of office and better prospects of promotion. Therefore, Wagner concluded that "the state often has at its disposal a quite exceptionally competent body of employees and, at equal salaries, a more efficient one than can be found anywhere else." 16 Due to the extra incentives the state can offer, civil servants would be as competent as or even better than employees in the private economy.
Wagner's Law is open as to the forms state involvement may take. For instance, invoking the subsidiarity principle, the state may take on additional tasks while at the same time delegating responsibilities elsewhere; either downwards in a decentralizing way or laterally like charging or creating additional institutions. By consequence, even a decrease in the state share of the social product would be compatible with Wagner's Law , since this law does not deal with expenses, but with tasks and their fulfillment and each task can be accomplished by either spending or regulation. The general rule for the state to take over a task is formulated as follows:
The state has to take over those activities to satisfy the needs of its members, which can neither be carried out by private units, nor by other, free or compulsory organizations (self governing bodies), or which can only be fulfilled by these units and organizations less well or at higher costs. 17
16 See Adolf Wagner. 1883. "Three Extracts on Public Finance." Extracts from Finanzwissenschaft , Part I, (3), Leipzig, pp. 4-16, 69-76. In: Musgrave, Richard A. and Peacock, Alan T., Editors. 1958. Classics in the Theory of Public Finance . London: The Macmillan Company, p. 4. 17 In the original, the quote reads as follows: "... der Staat hat diejenigen Tätigkeiten zur Befriedigung der Bedürfnisse seiner Angehörigen zu übernehmen, welcher weder die Privat wirthschaften, noch freie, noch andere Zwangs gemeinwirthschaften (Selbstverwaltungskörper) überhaupt oder welche 136
Three exceptions apply to the principle of subsidiarity. These three exceptions justify state action, but also delineate the scope for state action. The first two exceptions refer to characteristics in the production process, the third case relates to characteristics in the use of the good or service publicly produced.
First, exceptions are those cases, where the private provision of a good or service is based on the interest of an individual and thus ignores a long-term general interest. Wagner wanted the state to undertake large capital investments and guarantee production for a long period of time. He assumed that the bond rate must be lower than the private interest rate for borrowing, because the state is the better risk. This is only the case if budgetary discipline exists. Only under the condition of a balanced budget, the state can refinance itself.
Second, exceptions are cases, where a uniform regulation is desired. Here, production should lie in one hand and should extend over a wide area. Wagner assumed that local businesses can only reach a relatively small area. It gives rise to differences in prices and quality, local monopolies, and unavailability of goods and services in certain regions. A state can intervene by creating a larger business area, which Wagner typically wanted to achieve with an extension and improvement of the railroad. He had allocative questions in mind when he demanded that production should take place by the state. He wanted to prevent that a private company would create a monopoly and receive a large monopoly rent.
Third, exceptions are those cases, where many consumers benefit and marginal utility cannot be measured. These are public goods. Here, exclusion from the use of the good or service by additional customers would not be efficient. Wagner also included those cases where external effects are present, in particular, if other people have an advantage from the production of a good or service. (1892, op. cit. , paragraph 380).
In all of these cases, Wagner considered it as likely that a good or service will be provided by the state. Therefore, these cases form the basis of a political consent. 18 Not interest groups should become important in the decision of what is provided by the state, but on the basis of the conditions formulated, participants of the political process should be able to come close to unanimous vote on whether to support and consequently undertake state provision of the service or good, or not. Wagner was concerned about the possibility that the state would take over inappropriate functions and activities and that a good or service would be provided at too high a cost. He warned that the state might overestimate the value of its activities, expand them too far, or that the state might keep to old patterns of production and continue to produce superfluous services. (1892, op. cit. , paragr. 381).
alle diese nur weniger gut oder nur kostspieliger ausüben können." Wagner, op. cit. , 1892, Paragraph 377. 18 The intellectual link to Wicksell (and therefore Buchanan) is obvious at this point. Adolph Wagner. 1911, op. cit. , p. 738. 137
Wagner's three exceptional cases to the general rule of subsidiarity apply to the health care system. Examples are the following: requiring that production should be guaranteed for a long time period (case one) makes sense in basic medical research, where long lines of research and large capital investments are required.
Often, it is politically desirable that people in rural areas have the same access to health care as people in metropolitan areas. Then, the second case of uniform regulation is important. Differences with respect to access, prices and quality of health care provision and the finance of health care among different regions and countries could be eliminated. 19
If questions of equity and redistribution through the health care system are politically important, then production should lie in one hand. 20 An example is the foundation of the British National Health Service, which has presumably been founded for reasons of altruistic externalities. Those people, who formerly eschewed care, should consume more of it, if it is for free. 21 This is also important in developed countries without a National Health Care System, if the state wants to guarantee equal access to health care for all persons, or provide a minimum level of health care provision for the poor and needy people.
19 For a discussion of differences in health care systems see Hans Maarse and Aggie Paulus. 1998. "Health Insurance Reforms in the Netherlands, Belgium and Germany: A Comparative Analysis". Reiner Leidl. Editor. Health Care and its Financing in the Single European Market . Amsterdam: IOS Press (Biomedical and Health Research, Vol. 18). pp. 230 - 253. 20 For a discussion of the justification of equity and redistribution in health care see Alan Williams, 1997. Being Reasonable about the Economics of Health. Selected Essays by Alan Williams . A.J. Culyer, A.J. and Maynard, Alan. Editors. Cheltenham United Kingdom: Edward Elgar. An example is the broad support for health policy proposals, also by some modern health economists, who want the state to take an active role in health care in order to ensure access of all classes to health care. See, for instance, Hillary Clinton. 1996. It Takes a Village. Simon and Schuster. 21 Buchanan tried to understand and solve the following dilemma of the British National Health Service: on the one hand people presumably should have an incentive to consume more care, because additional care is considered to be beneficial, on the other hand, taxpayers are not willing to finance all care that is being demanded at a zero price. In the British National Health Service, the price mechanism cannot be used to equalize demand and supply, therefore, as a consequence of the dilemma described, other measures of rationing prevail such as long waiting lines, lists of priority, exclusion of some forms of therapy, etc. For a discussion of collective and market solutions of this dilemma see Mark Pauly: "James Buchanan as a Health Economist." Festschrift for James Buchanan . (p. 2, www.http://www.uniduisburg.de/ B1/ PHILO/ Buchanan/ files/ pauly.htm. August 1999.) 138
What is important for the third case that many consumers benefit and where marginal utility cannot be measured? In health care, differentiation of insurance contracts is typically politically restricted. People with serious illnesses tend to be treated financially in the same way as people who are less seriously ill. As a consequence of the political restriction moral hazard can occur, a change in a person's behavior leading towards an over utilization of medical services due to health insurance or any other reduction of the risk of illness. 22 Wagner proposed that the citizens should pay small fees for state services. Imposing patient cost sharing could restrict moral hazard in health insurance. All three of exceptions to the general rule of subsidiarity are met in the case of health care services and therefore, it can be concluded that according to Wagner there is a role in the finance and provision of health care for the state.
Wagner's prediction and projection of 1863 was that the tasks of the state in a complex and developed society would and should grow over time. Wagner, however, wanted to keep civil liberties intact. On this basis, he formulated his law as an evolutionary law. A discussion with respect to health care follows in the next section.
6.3 An Interpretation of Wagner's Law as an Evolutionary Law
A rise of the cultural development in a society leads to better health of the population; as people strive for a better education and higher incomes, bad health carries higher opportunity costs. The state intervention leads to a better health level of the population and to an additional cultural rise, which again increases opportunity costs of illness. Therefore, the demand for health care is expected to increase and preventive measures will gain in importance. Wagner recognized that through the state intervention, the system transforms itself and requires further state intervention. The state is part of this evolutionary process. Critical readers, who negate a role of the state in evolutionary economics, could pose the question, what is evolutionary about Wagner's Law , when government influence in the health care systems of developed Western countries is typically so strong? Critics typically suggest that by exerting power the state destroys the results of existing evolutionary economic growth. 23 According to this view, there is no role for
22 Here we recognize a parallel between Wagner and Buchanan. Wagner realized that a collective decision is required when marginal costs cannot be differentiated. Buchanan went a step further in viewing the resulting additional cost due to moral hazard "not as disembodied (or even specifically game- theoretic) individual or insurance-firm behavior, but rather placing it explicitly in the context of collective choice." Pauly disagreed with the collective approach and rather suggested giving people a choice of highly differentiated insurance contracts. Mark Pauly, op. cit. , p. 2. 23 This was suggested at the Workshop of the Max-Planck-Institute for Research into Economic Systems on History of Evolutionary Thought in Economics . Jena, August 26-28, 1999. Another suggestion was to look at the work of Joseph 139
state intervention in evolutionary economics. These critics misunderstand Wagner's Law which starts out from the cultural advance in society, and, through a change in the opportunity costs, implies an increase in the tasks of the state in a process of adaptation. In this sense, Wagner's Law has to be interpreted as an evolutionary law.
The cultural advance of society, including health improving measures, is not imposed on society, but comes from within the population. The following example illustrates Wagner's demand that civil liberties should be kept intact and transmittance of information not be destroyed by providing a good or service through the state. In the 1930s, Roman Catholic priests of the order of St. Edmund and nuns of the order of St. Joseph came to Alabama's Black Belt to help relieve poverty, a high infant mortality and other conditions that led to a low live expectancy especially among the black population. 24 When they came, they found a local health care system in place. They used the cottages and other small buildings, where black people had been treated before, until they were able to begin building new facilities. A federal grant through the Hill-Burton Program of $ 800,000 allowed the construction of a hospital in 1963, which replaced the small local health care facilities of the black community. Only twenty years later, this hospital had to be closed due to mounting debts leading to debt payments of $ 1 million annually. Additional health policy measures by the state were required to ensure the provision of health care in the area. A well- meaning effort by the church and substantial state support thus led to the destruction of small local self-help groups. The quality of health care these groups delivered was not considered acceptable, but instead of giving incentives to provide better service in the same small local environment, a new state-funded central hospital was built, which soon became financially unbearable. Not only the ability for self-help was destroyed, but also transmittance of information with respect to prevention, nutrition and other life-style factors important to health. The cottages and small buildings used to treat blacks had been centers of communication, which served to transfer health- related information not only to patients, but to people living in the area.
This example shows that by interfering in an evolutionary process, the system transforms itself and new state intervention will be required. The federal program failed, and the state became involved in a new and additional task of setting up a health care system as the local system had been destroyed. Centralization occurred at the wrong place. The effect had probably been less distortionary, if one had tried to strengthen the existing informal organization. The move towards cultural advance, leading to a higher education, better incomes, and better health, has to come from within the population, but cannot be imposed on a population. Then, Wagner's Law also leads to government intervention, and a transformation of the system requires new government intervention, but in a less distortionary way as described above. It
Schumpeter, who saw a role for the state as a political entrepreneur. There was a consensus at the Workshop that more research is needed on the role of the state in evolutionary economics. 24 Alvin Benn. "Saints of Selma." Montgomery Advertiser . July 28, 1999, pp. 1A, 4A. 140
was a main concern by Wagner that civil liberties and the informational base would be kept intact.
Wagner's concern with civil liberties can be related to the modern discussion of direct and indirect democracy. Empirical studies by Werner Pommerehne show that the budget size realized in different cantons in Switzerland is lower under direct democracy than under indirect democracy. 25 In some cantons in Switzerland, voting on the budget is done directly through a referendum, in others it is done by indirect vote. Pommerehne has found that the budget size is smaller, if the vote occurs through a referendum. Communities with direct democracy try to avoid additional layers of authority. Even if fairly large, they try to organize themselves as neighborhoods. Tax returns tend to be public and mutual trust is fostered. Public authority tends to be accomplished through honorary service and public service tends to be voluntary. However, as the issues become too complex, direct democracy is no longer feasible. Frey tried to determine the optimal mix of elements of direct and indirect democracy in order to maximize public sector efficiency. 26 He asked what the ideal constitution should consist of in order to prevent deceitful behavior of both, politicians and taxpayers alike, and at the same time establish trust between politicians and citizens, thereby maintaining civic values. This led him to the suggestion of FOCI (functional, overlapping and competing jurisdictions). 27
When Wagner formulated his law, he did not foresee the emergence of a capital market, which would give private investors access to capital. The focus of the next section will be to show how the emergence of capital markets changed the role of the state as perceived by Wagner. This will be illustrated with the example of health care. In contrast to Schmoller, Wagner also has not foreseen the negative effect of bureaucratization, which will be discussed at the end of the next section.
25 Werner Pommerehne. 1978. "Institutional Approaches to Public Expenditure: Empirical Evidence from Swiss Municipalities." Journal of Public Economics . 9, pp. 255-280, and 1982. "Steuern, Staatsausgaben und Stimmbürgerverhalten: Eine empirische Untersuchung am Beispiel der öffentlichen Subventionierung des Theaters." (Taxes, Public Expenditures and Voting Behavior: An Empirical Investigation at the Example of Public Subsidization of Theaters). Jahrbücher für Nationalökonomie und Statistik . pp. 437-462. 26 Bruno S. Frey. 1996. "A Directly Democratic and Federal Europe." Constitutional Political Economy , pp. 267-279; and 1997. "A Constitution for Knaves Crowds Out Civic Virtues." The Economic Journal . 107, 443, pp. 1043-1053. 27 Compare the explanation of FOCI in chapter 3 on Wolff. Frey, Bruno S. and Eichenberger, Reiner. 1999. The New Democratic Federalism for Europe. Functional, Overlapping and Competing Jurisdictions. Edward Elgar: Cheltenham UK. 141
6.4 Further Developments of Wagner's Law
In Wagner's analysis the state has preferred access to capital markets and therefore, capital intensive industries are to be found in the sector of state enterprise with high productivity growth potential. He predicted that in a culturally advancing society, innovations would lead to more complicated and capital-intensive methods of production in the future. 28
Historically, capital markets developed slowly. For instance, the Fugger and Welser families underwrote the campaigns of Charles V., who had no access to capital markets. In Napoleonic times, wars could be financed through access to capital markets. 29 Private access to credit was scanned, typically reduced to suppliers' lines of credit. Stock exchanges for corporate credit developed in the second half of the nineteenth century allowing private corporations to borrow large amounts of capital. Capital markets accessible to households are a phenomenon of the twentieth century.
Baumol and Bowen assumed the presence of a fully developed capital market. 30 Like Wagner, they predicted that a move towards more capital-intensive methods of production will take place in the future, but, in contrast to Wagner, they showed that this could not be realized in all sectors of the economy. Baumol and Bowen found that capital-intensive methods of production tend not be applied by the state, but by private corporations. Those are to be found in the thriving sectors of the economy. The state is typically to be found in the areas of the sectors of the economy, where productivity growth is low. Baumol and Bowen tried to explain this phenomenon and came up with the Baumol-Bowen Hypothesis . In what follows, we will take a closer look at this hypothesis, which focuses on productivity differentials, and its implications for health care.
Baumol and Bowen noted that there is persistence in the pattern of differences of productivity growth among different economic sectors in a developed economy. The
28 Wagner did not investigate the process of economic development in detail. This task was left for Schumpeter, who focused on the role of those persons with leadership qualities, who would pick up or make inventions and then turn them into innovations. He considered those innovators as the driving force of economic development. Compare the "Seventh Chapter" by Joseph Schumpeter. 1912. The Theory of Economic Development . Leipzig: Duncker & Humblot. 29 Compare David Ricardo. 1817. (1949). Principles of Political Economy and Taxation . London. 30 The framework for the analysis of productivity growth differences in economic sectors was developed when Baumol and Bowen analyzed the performing arts sector in 1966. The authors referred to the phenomenon as "cost-disease of the performing arts." William J. Baumol and W. G. Bowen. 1966. Performing Arts. The Economic Dilemma . New York: Twentieth Century Fund, p. 183. 142
analysis of long-term data of the performing arts, health care, education, police protection and legal services showed that the rise of real costs lies persistently over that of the inflation rate. 31 For instance, those sectors with low productivity growth, which Baumol and Bowen referred to as stagnant sectors of the economy, do not suddenly switch to periods of rapid productivity growth, but remain rather steady in their pattern of low productivity growth (1996, op. cit ., p. 183). Baumol found that in the stagnant sectors of the economy more personal services are required as inputs than in the thriving sectors. They identified the handicraft aspect which is central to those sectors.
For two reasons, personal services in stagnant sectors cannot easily be replaced by automation processes. First, it is hard to standardize the cases and second, the quality of service would decrease, when introducing automated services (1995, op. cit ., p. 14). In health care, physicians have to treat each case individually. When a physician cuts back the time he or she spends in treating a patient, then quality of diagnosis and treatment can be expected to be reduced. Due to these characteristics, it is difficult to implement technical progress into stagnant sectors, which would lead to productivity growth.
In stagnant sectors, an increase in costs causes a price increase, when it cannot be offset by productivity growth. This is known as the Baumol-Bowen Hypothesis and can be illustrated by the following example. After a car accident has happened, the damaged car can usually not be left to a robot for repair, but a mechanic has to work on it. If the mechanic gets a pay raise and nothing else changes, then costs for car repair will go up by the amount of his pay raise. This happens in a sector of the industry, where handicraft cannot be substituted by capital. In a sector, where technological innovation is high, an increase in costs does not have to lead to a price increase. Baumol and Bowen illustrated this with the example of the production of new cars. If a new idea leads to an automation process increasing productivity, then costs of the new cars will decrease. If workers in the new car industry get a pay raise, then this means an increase in costs of the new cars, but it might be offset or partially offset by the productivity growth caused by the innovation, which decreased costs. This example shows that the effect of an increase in costs in stagnant sectors is different from other sectors of the economy, which can fully take advantage of technical progress.
Due to the characteristics of stagnant sectors, problems of standardization and an expected loss in quality would occur, if beyond a certain limit technical progress would be integrated into the production process. The introduction of High-Tech
31 William J. Baumol. 1995. "Health Care as a Handicraft Industry." The Office of Health Economics , Annual Lecture, p. 7. For example, Baumol tried to explain why between 1948 and 1995 the price of physician's services rose by more than 5.5 % per year, as compared to the rise of the consumer price index of roughly 4 %, or why in the same time period, the price of a hospital room shows an annual average increase of 8.6 % which is well above the rise of the consumer price index. 143
medicine into health care is a promising field leading to better methods of treatment and enabling shorter stays in hospital, but High-Tech medicine is not applicable to all cases. The consequence of Baumol's hypothesis of stagnant sectors is to substitute as much capital as possible for labor in order to avoid a long-run increase in costs of health care production. Such a development can be observed, especially in form of High-Tech medicine, which is being introduced in hospitals. This is typically not seen as a cost-saving development, but as the opposite: a cost factor, especially if it takes the form of High-Tech. (Mittelstrass, op. cit. , p. 35). Of all areas in medicine, development and introduction of High-Tech medicine has been strongest in the field of surgery. While High-Tech medicine has a place in health care, leading to better methods of treatment and enabling shorter stays in hospital, health care remains a stagnant sector, which requires medical judgment on a case by case basis and provision of care on a personal basis. In stagnant sectors, increasing automatization is generally not a method to further reduce health care costs.
Stagnant sectors can be both, public or private, but often they are to be found in the public sphere. Due to the productivity growth in some sectors of the economy, which tends to be in the private sphere, people become wealthier over time. As private affluence increases, Baumol argued that people will better be able to pay for the goods and services produced by a stagnant sector. He proposed the introduction of own contributions and a broad-based managed care approach. He also recommended measures that tend to shift stagnant sectors to the private sphere, such as more private hospitals, more private schools, etc. (1995, op. cit. , p. 31). 32 Baumol wanted everyone to reach a certain minimum standard of health care (1996, op. cit. , p. 184). Therefore, he proposed basic insurance to cover catastrophic risks of a country's population. 33
Bureaucratization could lead to higher employment. Two effects need to be distinguished here. On the one hand, shielded sectors, irrespective whether they are public or private, leave opportunities for productivity increase unutilized and therefore retain relatively higher payrolls than competitive firms. In addition, monopolies tend
32 The health care policy measures proposed are also based on Baumol's and Blinder's work on efficiency and the theory of contestability. According to the Contestability Hypothesis , a firm in a monopoly situation behaves as if there were competitors in the market, because it wants to prevent market entry by potential competitors. There is an incentive to the company to make market entry unattractive to other companies. The monopoly can do this by keeping profits relatively small and providing consumers with an attractive supply of goods. Compare William J. Baumol, and Alan S. Blinder. 1982. Economics: Principles and Policy . San Diego: Harcourt Brace Jovanovich. 33 For a discussion of public health policy and the adjustment processes caused, compare Ursula Backhaus, Ursula. 2000. "My Family Doctor is not a Robot: An Application of the Baumol-Bowen Hypothesis to Health Care." Gerrit Meijer, Wim J. M. Heijman, Johan A. C. van Ophem, Bernard H. J. Verstegen. Editors. The Maastricht ISINI-Papers . Vol. I, pp. 25-34. The Netherlands: Shaker Publishing. 144
to develop bureaucracies which can be described by Niskanan's model where budget and typically payroll maximization reasonably describe organizational behavior. 34 There is a state monopoly in many of the stagnant sectors; therefore, stagnant sectors enjoy more security in employment and funding than free-market sectors. As a consequence of bureaucratization, there is a tendency towards a rise in employment instead of a decline as might have happened in a purely private, competitive sector. 35
Buchanan and Tullock have variously pointed out that market failure cannot be construed as a cause for government to intervene. First, one has to show that governments can perform better than the market. This was the problem of Adolph Wagner. He believed that government can work better than the market. In contrast, Schmoller has shown how a program designed on the principles of common agricultural policies will lead to an ever widening web of governmental interference into markets and result in and persevere malfunctioning of both, governmental agencies, the respective markets, and their interaction. While Wagner has a predisposition in favor of state policy initiatives, Schmoller is quite aware of state policy failure. For example, for the example of agricultural policy, the Kanitz Act Proposal, he gives an in-depth analysis. 36 Spot wise interferences into the health system by contemporary governments tend to develop the same pattern. Adolph Wagner did not see these unintended consequences of governmental interference into markets as he was convinced that governmental leaders (enlightened civil servants and hereditary rulers) were guided by ethical convictions. However, in favor of Wagner it has to be emphasized that he primarily thinks of state intervention through public entrepreneurship instead of regulation. State policy through market participation typically does not lead to market failure.
6.6 Summary and Conclusions
Wagner's Law starts out from the cultural advance in society, and, through a change in the opportunity costs, implies an increase in the tasks of the state in a process of
34 William A. Niskanen, Jr. 1971. Bureaucracy and Representative Government. Chicago: Aldine Publishing Company. 35 Empirically, such an employment effect of bureaucratization has been shown with respect to the arts. Today, more people are employed in large public theaters than there used to be. The same performances took place in much smaller, often private theaters. For instance, Goethe employed in his own private theatre very few people for the same performances we can see today. Compare Jürgen Backhaus. 1978. "A Comparison between Public and Private Theatres", unpublished manuscript. 36 Backhaus, Jürgen. 1999. "The Kanitz Act Proposal: European agricultural policy in theoretical and historical perspective." Journal of Economic Studies . "Freedom, Trade and the Nation-State." MCB University Press, 26, 4/5, pp. 438- 448. 145
adaptation. Wagner's Law is an evolutionary law, which states that the cultural development is not imposed, but comes from within. Wagner also predicted that the principle of prevention would become more important over time, both in law and in health care. Wagner assumed that the state plays an important role in providing capital. Hence, the state finances medical (and other) research, which presumably leads to new innovations and further progress of society. In the health economy today, the conditions under which Wagner formulated his law have changed. Health policy measures are sometimes imposed by government, capital markets exist, and distortionary effects of bureaucracy of both, markets and governments, might be present. Therefore, while the underlying principle is true, we can only cautiously interpret our reality with Wagner's Law .
Wagner's analysis of the state budget and the proper limits of the state with respect to health care lead to insights which are important for issues so far neglected in health economics. In diagnosing an increase in the functions of the state, Wagner was correct, and certainly for the case of a graying population. He did not see, however, the innate pressures of a state health organization even beyond its purpose. He considered the state and bureaucrats as able to efficiently provide services. Unlike Schmoller, he did not perceive bureaucratic inefficiencies as mentioned above. And he certainly did not see the consequences of his own Law. A large state health organization, which is not organized according to insurance principles, would lead to a deterioration of health services instead of an improvement, for which he had wished.
The relevance of Wagner's approach consists in two parts. On the one hand, we want to understand to what extent Wagner's Law can explain current trends in state involvement and expenditure with respect to health care. Here, our findings are that the explanatory power is limited. As has been shown above, further developments such at the economic theory of bureaucratization or the Baumol-Bowen Hypothesis fill in gaps. On the other hand, one does not do justice to Adolph Wagner, the public finance theorist, if one neglects his normative concerns. Here we strike a fertile mind. 37 The three exceptions Wagner formulated with respect to the subsidiarity principle were directed at achieving a broad consensus among citizens and politicians in order to support the measures publicly undertaken. They can be used as a yardstick against current developments and may help in the formulation of policy.
37 In comparison with his contemporary and leader of the Younger Historical School, Gustav Schmoller, Wagner's strength lay in his normative approach. Schmoller arrived at conclusions solely on the basis of empirical statistical material. Compare Hansen, 1997, op. cit. 146
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Chapter 7
Carl Menger (1840-1921):
Perceptions of Health in the Economy
Contents
7.1 Introduction
7.2 Austrian Thought and Perceptions of Health in the Economy
7.3 The Role of the Subjective Discount Rate in Health Economics
7.4 Summary and Conclusions.
This chapter is a revised version of my publication: "Austrian Aspects to Health Economics." Modern Applications of Austrian Thought. Editor: Jürgen G. Backhaus. London: Routledge, pp. 175-194. 153
7.1 Introduction
Carl Menger (1840 - 1921) founded Austrian Economics with his Grundsätze der Volkswirtschaftslehre (Principles of Economics, 1868). 1 In this work, he saw the importance of health as a factor contributing to the development of a nation, which is brought about by individual planning and provision for the future. 2 He thus builds on the old Cameralist tradition. 3 Hence, public policy was among other things directed to maintaining public health standards. Menger’s students and proponents of the Austrian School, Friedrich Freiherr von Wieser (1851-1926) and Eugen von Böhm-Bawerk (1851-1914), further developed his thought and established the reputation of the Austrian school of economics. The major cornerstones of Austrian Economics are methodological individualism, methodological subjectivism, and an emphasis on time.
In the introduction, Menger’s biography shows that as the teacher of Crown Prince Rudolph he was presumably not without political influence. In section 7.2, an overview of Carl Menger's perceptions of health in the economy follows, in particular his discussion of the role of error with respect to the production and consumption process and the role of health in individual planning and provisions made for the future, an idea, his successor Böhm-Bawerk built upon. The concept of a subjective discount rate has found entry into modern health economics as will be illustrated in section 7.3. The chapter ends with a summary and conclusions.
Carl Menger was born in 1840 in Neu-Sandec, Galicia, the Austrian Empire and he died in 1921 in Vienna. 4 He studied in Vienna and Prague and in 1867 he received his doctoral degree in jurisprudence from the Jagiellonian University in Krakow. Then, he worked as an investigative journalist of a government sponsored newspaper reporting on economic issues. On this basis the government thought to launch an academic career for him at the University of Vienna, an effort that failed in first instance, because
1 Carl Menger. 1871 (2). Grundsätze der Volkswirtschaftslehre . Volumes I-IV. Friedrich A. Hayek. Editor. Tübingen: Mohr Siebeck. 1868, first edition. 2 In his Principles , Menger frequently has used the term "Volk" which has been translated as "nation" throughout. With reference to the polyglot territories of Austria-Hungary and eastern Prussia, Mises later has clarified the term in relating it to a speech community. Leland B. Yeager. 1999. " Nation, State and Economy : Mises contribution." Journal of Economic Studies . Backhaus, Jürgen G. Guest Editor. Freedom, Trade and the Nation-State . MCB University Press, 26, 4/5, pp. 327-337, see in particular p. 331. 3 Compare chapter 4, this volume. 4 The biographical notes of Carl Menger are based on Friedrich Hayek's introduction to the second edition of the Grundsätze der Volkswirtschaftslehre , pp. vii-xxxvi, op. cit. , and the entry in the German Biographical Encyclopedia: “Menger, Carl.” Deutsche Biographische Enzyklopädie . Editors: Walther Killy and Rudolph Vierhaus. 2001. Munich: dtv. Volume 7, p. 67. 154
the faculty (von Stein) rejected the habilitation thesis. This thesis later proved to be controversial in more than one sense. His most important work was written in 1868, Grundsätze der Volkswirtschaftslehre , op. cit. , where he tried to show the relationships among utility, value, and price. Thereafter, Menger accepted a position in the Austrian civil service. In 1873 he became a professor of political economy at the University of Vienna. In 1876 he was named the teacher of the Austrian Crown Prince Rudolph who received fifteen lectures on political economy. 5 In 1903, Menger retired from his professorship in Vienna and devoted himself to the completion of his studies in economics, but tragically, most of his late work was lost because of his endless efforts to revise his work.
Menger contributed to the formulation of a subjective theory of value. He explained relative prices on the basis of subjective individualism. Individualism refers to the unconscious situation of individual preferences determining social institutions. With social institutions, Menger meant prices and other economic phenomena. Menger was aware of the principle of marginal utility, but did not apply it systematically. He did not use the concept of marginal utility to explain relative prices; it was later introduced by Wieser. 6 Today, Menger's approach is accepted in the mainstream. He changed the research program, because now we look at the individual as the point of departure, not at the economic context. The Austrians such as Menger distinguished between economic spheres and extraeconomic spheres. In such a distinction, health is not an economic phenomenon. Schumpeter in his Seventh Chapter tried to break the mold. 7
Menger wrote his early and major work, the Principles ( op. cit .), in a time when the cultural and industrial development has led to a new post-feudal upper class with new attitudes and diseases. In his analysis of the economy, he has emphasized the role of the individual as the decision-taking unit and the role of time in the production and consumption process. He explored issues of perception and education as determinants of better health. Health aspects in the Principles ( op. cit .) appear in relation to what Menger perceived as human error and processes of learning and with respect to the cultural development of a nation. A presentation of related quotes and their context follows in section 7.2. Böhm-Bawerk built on Menger’s ideas, as will be shown later in this section.
5 Erich Streissler and Monika Streissler. Editors. 1994. Carl Menger's Lectures to Crown Prince Rudolph of Austria . Aldershot: Edward Elgar. 6 Menger explained relative prices with a kind of equimargible principle. By equimargible principle is meant that marginal utility is expressed in terms of a numeraire good. Lecture by Dr. Karl Milford on Carl Menger at Maastricht University (May 22, 2000). For the treatment by Friedrich von Wieser compare 1889. Der natürliche Werth. (Natural Value). Vienna: Hölder. 7 Joseph A. Schumpeter. 1912. "Seventh Chapter." The Theory of Economic Development. Leipzig, Verlag von Duncker & Humblot. The most striking example of breaking this mold, however, is Simmel with his Philosophy of Money . Money as an economic phenomenon is treated in this book from various points of view except those economic. Georg Simmel. 1900. Philosophie des Geldes. Leipzig: Duncker & Humblot. 155
7.2 Austrian Thought and Perceptions of Health in the Economy
Development of a nation takes time and requires "cause and effect". (Menger, 1971(2), op. cit. , p. 21). Menger considered planning ahead in the production and consumption process as a prerequisite for cultural development. In this process, he foresaw the possibility of human error, in particular with respect to the nature of goods and needs, and individual provision for the future.
A substantial part of Menger's library at the Hitotsubashi University consists of medical books, which shows his interest in the human body. Albert Schäffle, who held a chair at Vienna University since 1868 was presumably not without influence on Menger. He shared with Menger the view that "cause and effect" are not restricted to phenomena of the natural sciences, but can be applied to social activities of people as well. 8 Menger occasionally referred to examples where the functioning of the human body was involved, but clearly departed from Schäffle who analyzed the economy in analogy to the human body. 9 In leaving the tradition of body politics, Menger saw "cause and effect" from a need to its satisfaction either occurring within the body or outside.
When therefore our person should move from the state of desire into that of the satisfied need, then there have to be sufficient causes to bring this about. This means that either the forces acting in our organism have to remove our distracted state, or that things from outside of ourselves have an influence on us, which by nature are able to bring about that state we refer to as satisfaction of our needs. 10
Goods are those things, which can be used to satisfy needs. Four requirements have to be met for a thing to become a good. ( Principles , 1971(2), op. cit. , p. 3). First, a
8 Both, Schäffle and Menger, stress the restrictions under which persons act. Yukihiro Ikeda. 1997. Die Entstehungsgeschichte der "Grundsätze" Carl Mengers . (The History of the Sources of Carl Menger's "Principles"). St. Katharinen: Scripta Mercaturae Verlag, p.71. 9 Albert Schäffle. 1867(2). Das gesellschaftliche System der menschlichen Wirthschaft . (The System of Society of the Human Economy). Tübingen: Verlag der Laupp'schen Buchhandlung. 1896. Bau und Leben des socialen Körpers . (The Organization and Life of the Social Body). Tübingen: Verlag der Laupp'schen Buchhandlung. 10 The original German quote by Menger reads as follows: "Wenn demnach unsere Person aus dem Zustande des Bedürfens in jenen des befriedigten Bedürfnisses treten soll, so müssen ausreichende Ursachen hierfür vorhanden sein, das ist, es müssen entweder die in unserem Organismus waltenden Kräfte unseren gestörten Zustand beseitigen, oder aber äussere Dinge auf uns einwirken, welche ihrer Natur nach geeignet sind, jenen Zustand herbeizuführen, welchen wir die Befriedigung unserer Bedürfnisse nennen." 1971, op. cit. p. 1. 156
human need must be present; second, the causal relationship must be given in the sense that the thing must possess qualities that enable it to satisfy the human need; third, a person has to be aware of the causal relationship between satisfaction of the need and the thing; and fourth, a person has to be able to dispose of it for satisfying the need. If at least one of these four requirements has not been met, then a thing cannot become a good.
Menger considered it an error, if individuals believe that things have good character, which in reality they do not have; he referred to them as imaginary (eingebildete) goods. According to his view, it is also an error, if people assume a need to be as given which they do not really have. An illustration is the following:
A special relationship can be observed in those cases, when things are treated as goods, which do not stand in a causal relationship with the satisfaction of human needs. This happens if things are falsely thought to have properties, which in reality they do not have, or if human needs are falsely assumed, which in reality do not exist. ... To the things of the first kind belong most cosmetic goods, amulets, the majority of medicine, which is given to the ill in a low standing culture, and in the case of raw peoples still in the present, divining rods, love drinks, etc., because all of these things are in reality unable to satisfy those human needs, which they are supposed to satisfy. To the things of the second kind belongs medicine in order to cure illnesses, which in reality do not exist... 11
First, in a society at a low cultural level, medicine is often ineffective, which is an example that this good does in reality not have the qualities and effects expected. Second, if medicine is prescribed for imaginary illnesses, then human needs are
11 The original German quote by Menger reads as follows: "Ein eigentümliches Verhältnis ist überall dort zu beobachten, wo Dinge, die in keinerlei ursächlichem Zusammenhange mit der Befriedigung menschlicher Bedürfnisse gesetzt werden können, von den Menschen nichts destoweniger als Güter behandelt werden. Dieser Erfolg tritt ein, wenn Dingen irrthümlicherweise Eigenschaften, und somit Wirkungen zugeschrieben werden, die ihnen in Wahrheit nicht zukommen, oder aber menschliche Bedürfnisse irrthümlicherweise vorausgesetzt werden, die in Wahrheit nicht vorhanden sind. In beiden Fällen liegen demnach unserer Beurtheilung Dinge vor, die zwar nicht in der Wirklichkeit, wohl aber in der Meinung der Menschen in jenem eben dargelegten Verhältnisse stehen, wodurch die Güterqualität der Dinge begründet wird. Zu den Dingen der ersteren Art gehören die meisten Schönheitsmittel, die Amulette, die Mehrzahl der Medicamente, welche den Kranken bei tief stehender Cultur, bei rohen Völkern auch noch in der Gegenwart gereicht werden, Wünschelruthen, Liebestränke u. dgl. m., denn alle diese Dinge sind untauglich, diejenigen menschlichen Bedürfnisse, welchen durch dieselben genügt werden soll, in der Wirklichkeit zu befriedigen. Zu den Dingen der zweiten Art gehören Medicamente für Krankheiten, die in Wahrheit garnicht bestehen..." Menger, 1971, op. cit. , p. 4. 157
assumed as given, which in reality do not exist. It was Menger's prediction that as a nation becomes more developed, people acquire more knowledge, they make fewer errors about the character of goods, and there will be less imaginary goods in the economy (1971(2), op. cit. , p. 5). But what about imaginary needs? Menger did not make a prediction about the development of imaginary needs in the future.
As Mises has pointed out, Menger's distinction between real and imaginary goods and needs is not consistent with a strictly subjective base. According to Mises, an economist following a strictly subjective view cannot assess people's needs and the character of the goods to satisfy those needs. 12 This shows that in Menger's analysis the subjective base is not yet fully developed. 13
According to Menger, a good, either a matter or a service, can also consist in an activity not undertaken. Menger illustrated the value of an activity not undertaken as follows: "... the circumstance, that a rich physician living in a small country town with only one other physician stops practicing is even less a work effort of the former, but for the latter, who thereby becomes a monopolist, it is a very useful act of omission." 14 In cases such as these, Menger considered the market structure, but he neglected the welfare effects of a local monopoly in health care.15 The lectures he gave to Crown Prince Rudolph show that he was in favor of a minimum of state interference. (Streissler and Streissler, 1994, op. cit. )
12 Steven Horwitz. 1994. "Subjectivism." The Elgar Companion to Austrian Economics . Peter J. Boettke. Editor. Aldershot: Edward Elgar, pp. 17-29, p. 18. 13 For further elaboration, compare Ingo Pellengahr. 1995. The Austrian Subjectivist Theory of Interest . Frankfurt: Peter Lang. 14 The original German quote by Menger reads as follows: "Der Umstand, dass Jemand bei mir seine Waaren einkauft, oder meine Dienste als Advocat in Anspruch nimmt, ist sicherlich keine Arbeitsleistung desselben, aber eine mir nützliche Handlung, und der Umstand, dass ein wohlhabender Arzt, der in einem kleinen Landstädtchen wohnt, wo sich ausser ihm nur noch ein anderer Arzt befindet, die Praxis auszuüben unterlässt, ist noch viel weniger eine Arbeitsleistung des Ersteren zu nennen, aber jedenfalls eine für den Letzteren, der hierdurch zum Monopolisten wird, sehr nützliche Unterlassung." 1871, op. cit. , p. 6. 15 The welfare effects of a monopoly in health care have already been a problem to Paracelsus and to the Cameralists, who feared that the provision of health care to the population is insufficient and possibly of low quality. The Cameralists wanted to ensure minimum quality standards of health care through supervisory committees. Menger's successor and proponent of the Austrian School, Böhm- Bawerk, considered monopolists' fear of outsider competition as the most effective means against unscrupulous exploitation of their monopoly position. According to Böhm-Bawerk, markets should not be regulated against the behaviour of market participants, but in line with what they want to achieve. Eugen von Böhm-Bawerk. 1975. Macht oder ökonomisches Gesetz? (Market Power or Economic “Law”?) Darmstadt: Wissenschaftliche Buchgesellschaft, pp. 26, 27. 158
The production process takes time and is connected to consumption. By distinguishing between goods of higher and of lower order, Menger has integrated the production and consumption process. Goods of lower order are able to satisfy a need immediately, for instance tobacco, which is a good of first order. Other goods, for instance tobacco leaves and tobacco seeds are necessary to make the tobacco and are called goods of second order. Tools, human labor, or the tobacco plot are even further away from immediately satisfying a need and are considered goods of third and fourth order. In the example given, tobacco leaves and dry air are complementary goods. They are necessary in order to make tobacco. In a highly developed economy, complementary goods will be provided through the market. 16 People's preferences can change, and sometimes they change very suddenly. In the example of a sudden stop in the use of tobacco this would lead to a wealth of adjustment processes, making the stock of tobacco leaves and seeds obsolete and requiring a different use of the land, of the farmhands who had been working on the tobacco fields, and of the machines used. In case of a disturbance such as war or a sudden preference change, shortages or surpluses of complementary goods can occur and temporarily lead to unemployment.
The longer the production process, the more time it takes to transform goods of higher order into goods of lower order, and the higher will be the degree of uncertainty with respect to quantity and quality of the good produced. For the further development of a nation it is important that people employ goods of higher order. In a culturally high- standing nation, Menger has considered planning for a lifetime and beyond not as unusual. He has argued that we enjoy the fruits of the provisions for the future of the past when we have to use the services of a lawyer or physician, as it would be too late to acquire these skills at the moment we need them. (1871, op. cit. , p. 33). Individuals will plan ahead for expected developments and to a certain degree make provisions for unforeseen needs in the future. In a similar way, communities will act and anticipate the increased future need when planning public buildings such as schools and hospitals, roads, parks, water facilities, etc. (Menger, 1871, op. cit. , p. 39). This is central to Wagner's Law , of which Menger seems to be aware of.
While planning ahead in the production process is important for cultural development, planning ahead in the consumption process is also a significant factor contributing to development. 17 As in the production process, Menger has started with a basic example related to the consumption of food.
Goods have value, because they can satisfy our needs. (Menger, 1871, op. cit. , p. 75, p. 85). Satisfaction of individual needs has a subjective component, as individuals equalize marginal utilities when consuming or producing different goods and services, and an objective component, as consumption depends on the means someone has to spend and on availability of certain goods or services. Marginal utility from the
16 Menger used the term "Verkehr" when he referred to the market. 1871, op. cit. , p. 16. 17 Auke R. Leen. 1999. The Consumer in Austrian Economics and the Austrian Perspective on Consumer Policy . Dissertation, Wageningen. 159
consumption of a certain good such as food intake typically decreases, if the consumption of the good increases.
Up to the point to where subsistence is secured, satisfaction of the need for food fully means to every person to maintain his life. As observation teaches us, consumption above the subsistence level to the same person only has the meaning of a more and more decreasing satisfaction, until consumption has reached a certain level, where the satisfaction of the need for food is already fully reached, so that every additional intake of food neither contributes to maintaining life itself, nor makes a positive contribution to health, nor leads to additional satisfaction to the consumer, but starts not to matter to him any longer. Eventually, further consumption will become painful, a jeopardy to health, and finally a threat to life itself. 18
According to Menger, people do not always act in an enlightened way. He wrote that experience has taught us "a current satisfaction or satisfaction in the near future seems to be more important to people than a satisfaction of the same intensity in a more distant point in time." 19 Even if people are not dumb and try to make rational decisions, they easily make errors in evaluating future needs.
In particular, people easily get misled when they estimate the value of those satisfactions of needs, which improve their well-being in an intense, but fast passing way as higher than the value of those satisfactions of needs, which are less intense, but which occur over longer periods of time. Not infrequently, people evaluate passing intense pleasures as higher than their permanent welfare, sometimes even higher than their own life.20
18 The original German quote by Menger reads as follows: "Die Befriedigung des Nahrungsbedürfnisses bis zu jenem Puncte, wo hiedurch das Leben gesichert ist, hat für jeden Menschen die volle Bedeutung der Erhaltung seines Lebens, die darüber hinausgehende Consumtion hat für dieselben lediglich die Bedeutung eines - wie die Beobachtung lehrt - noch überdiess sich immer mehr abschwächenden Genusses, bis die Consumtion endlich an eine gewisse Grenze gelangt, wo die Befriedigung des Nahrungsbedürfnisses bereits eine so vollständige ist, dass jede weitere Aufnahme von Nahrungsmitteln weder zur Erhaltung des Lebens, noch zu jener der Gesundheit beiträgt, noch auch dem Consumenten einen Genuss gewährt, sondern ihm gleichgiltig zu werden beginnt, um bei der etwaigen Fortsetzung derselben zur Pein zu werden, die Gesundheit und schliesslich das Leben zu gefährden" Menger. 1871, op. cit. , p. 91. 19 The original German quote reads as follows: "Ein Genuss pflegt den Menschen, wie alle Erfahrung lehrt, in der Gegenwart, oder in einer nähern Zukunft wichtiger zu erscheinen, als ein solcher von gleicher Intensität in einem entfernteren Zeitpuncte." (1871, op. cit. , p. 128). 20 The original German quote reads as follows: "Insbesondere lassen sich die Menschen leicht verleiten, die Bedeutung von Bedürfnissbefriedigungen, welche in intensiver, wenn gleich auch nur rasch vorübergehender Weise ihr 160
Menger thought it to be bad judgment, if a person evaluates the present satisfaction of a need as higher than the future satisfaction of needs, in particular if the immediate satisfaction is accompanied by negative health effects. This high time preference, associated with negative health effects, Menger considered an obstacle to planning and provision for future needs, which are important for the cultural development of a nation. In order to encourage cultural development, he has recommended that people should use goods of higher order, build up long production processes, accumulate knowledge and plan for further knowledge accumulation, for instance by setting up institutions for the education of highly specialized professionals. Building up capital is crucial in this process of cultural development. In this, he can hardly be distinguished from what Schmoller proposed.
In building up culture, Menger distinguished between two types of capital. (1871, op. cit. , fn., pp. 130, 131). The productivity resulting from land or buildings is different from the productivity resulting from that part of capital which is often represented by sums of money. In Menger's terminology, human labor is a part of capital of the former kind and a good of higher order. In other words, one can invest by buying machines and setting them in operation, but one can also invest by training people and asking them to solve problems as is the case in the example of the pharmaceutical industries. The actual production of most advanced drugs involves miniscule costs. The cost lies in researching, developing, getting approval, marketing, and continuous observation of long term effects. Virtually all the capital involved is human capital; virtually all the capital affected by the use of these drugs is human capital. Menger's concept was further developed by Böhm-Bawerk, whose most important original contribution was his theory of capital and interest. 21 In his lectures, Böhm-Bawerk saw health as an input in production.
People should strive to reach the maximum of utility in their personal lives with as few sacrifices as possible; it is a sacrifice, if people's health suffers from working. Böhm- Bawerk described health as an input in the production function. 22 Mental and physical health might suffer, if an employee faces one-sided requirements due to the division of labor.
Wohlbefinden fördern, höher anzuschlagen, als solche Bedürfnissbefriedigungen, von welchen ein zwar minder intensives, aber über lange Zeitperioden sich erstreckendes Wohlbefinden abhängig ist, das ist, sie pflegen nicht selten vorübergehende intensive Genüsse höher zu achten, als ihre dauernde Wohlfahrt, ja bisweilen höher sogar als ihr Leben." Menger, 1871(2), op. cit. , p. 122. 21 Friedrich A. von Hayek. 1968. "The Austrian School." International Encyclopedia of the Social Sciences . 4, pp. 458-462. 22 Shigeki Tomo (Ed.). 1998. Eugen von Böhm-Bawerk. Innsbrucker Vorlesungen über Nationalökonomie. Wiedergabe aufgrund zweier Mitschriften . (Eugen von Böhm-Bawerk. Innsbruck Lectures on Economics. Copy on the Basis of two Transcripts.) Marburg. Metropolis. p. 43. 161
A far-reaching division of labor can also contribute to unemployment. A worker, who has only developed limited skills due to the one-sidedness of requirements at work, will find it difficult to find new employment, if he or she gets laid off. In his Lectures , Böhm- Bawerk has shown that loss of employment is likely to occur under a far-reaching system of division of labor, which requires an organization for coordination. Coordination becomes difficult in times of war and political unrest, and can easily be disturbed, if it takes place at an international level. (Tomo, 1998, op. cit. , p. 137). As remedies for the disadvantages of a far-reaching division of labor, Böhm-Bawerk has proposed shorter work hours, so that time is left for the regeneration of health through leisure and cultural activities. By offering the possibility for a continuing general education, Böhm-Bawerk proposed to raise the level of knowledge, so that people would be less affected by the one-sidedness in the production process. He proposed to offer support to those employees, who became unemployed. Böhm-Bawerk wanted to build a stronger organization which was better able to prevent unemployment, for instance by hiring qualified professionals, economically and technically skilled employees who could function as supervisors and who would be responsible for the coordination of work. In addition, he suggested supporting labor by as much physical capital as possible in order to enable a development, where the productivity of labor is high so that output can be produced at a low level of labor input. (Böhm-Bawerk, op. cit. , p. 138).
Like Menger, Böhm-Bawerk, considered a larger concern of the future, where the rate of time preference is consistent with a low subjective discount rate, as conducive to the cultural development of a nation. People are willing to forgo and postpone consumption to a later period in their life. This would lead to an increase of national savings and national capital. (Böhm-Bawerk, op. cit. , p. 308).
In his work on capital and interest, Böhm-Bawerk was concerned with the valuation of goods and services. He was strictly opposed to the idea that the amount of labor as input for goods and services determines their value. He argued that the existence of the phenomenon of interest shows that there must be another determinant of value than labor. "One does not receive interest on capital because of some kind of work performed, but simply, because one is owner; interest on capital is not a labor income, but an income due to possession." 23 In the second volume on Positive Theory of
23 The original German quote reads as follows: "Insbesondere lassen sich die Menschen leicht verleiten, die Bedeutung von Bedürfnissbefriedigungen, welche in intensiver, wenn gleich auch nur rasch vorübergehender Weise ihr Wohlbefinden fördern, höher anzuschlagen, als solche Bedürfnissbefriedigungen, von welchen ein zwar minder intensives, aber über lange Zeitperioden sich erstreckendes Wohlbefinden abhängig ist, das ist, sie pflegen nicht selten vorübergehende intensive Genüsse höher zu achten, als ihre dauernde Wohlfahrt, ja bisweilen höher sogar als ihr Leben." "Man bekommt den Kapitalzins eben nicht dafür, daß man dabei eine Arbeit leistet, sondern einfach, weil man Eigentümer ist; der Kapitalzins ist kein Arbeits-, sondern ein Besitzeinkommen ." Eugen von Böhm-Bawerk. 1921 (4). Kapital und Kapitalzins. I. Geschichte und Kritik der Kapitalzinstheorien . (Capital and 162
Capital Böhm-Bawerk has shown that all forms of interest are based on a difference in value between future and present goods. Psychological factors and differences in production technology cause the original difference in value. (1921, op. cit. , p. 454).
Concerning the psychological side, Böhm-Bawerk built on Menger. He gave the example of farmhands without own possessions. In comparison to capitalists, the farmhands would always more strongly prefer present to future consumption; the capitalists would wait. (1921, op. cit. , p. 458, note 2).
Concerning the technological side, Böhm-Bawerk developed as the basic notion that waiting is the essence of capital formation and will increase productivity. In many areas of production, time is an important element. This is true in agriculture, in hunting and fishing, and in particular in forestry, where the process of production can easily take more than a century. During this process of production the producer has to wait, but he does not sit idle. He has to take care of the field, the pond, or the forest. In industrial production, time can also be of essence, even in this time of the delivery of turn-key factories, a global division of labor, and almost instantaneous communication. Production requires research planning and organization and is never instant. In this sense, time is necessary, but this is time that is necessary for activities, and not for idle leisure. Often, the analogy is used of wine that matures and gets better with age. Only selected wines of a minimum quality can improve and they have to be selected carefully. Further, they have to be kept under adequate conditions in order to improve. Interest exists, because waiting is painful; a sacrifice, made only if there is sufficient compensation. That compensation can be offered to the suppliers of waiting, because waiting can be used to create additional value.
A totally different situation arises, when for instance in health care, for ethical, religious, or political reasons, the market mechanism cannot be used for allocation. Babies, kidneys, or hearts cannot be bought and sold in most circumstances. Often, as Calabresi pointed out, a substitute and less efficient mechanism for allocation has to be used.24 This is typically the queue (waiting in line). In modern societies, we find it in health care, but also in the legal system. The queue is politically expedient. It helps reducing expenditures (while at the same time generating substantial costs). From the point of view of political illusion, the queue has the advantage that it never gets beyond a certain length. This is, because an additional patient or plaintiff joins the queue only, if the expected value of the treatment or contract settlement is at least slightly higher than the cost of waiting. The cost of waiting consists mostly in opportunity cost and is the higher, the more severe the health condition or the more important the legal case. In this sense, although in a very costly way, the queue as an allocative mechanism does make a selection between economically more and less important cases. The longer the queue, however, the higher the social cost imposed on society by this allocative mechanism. It is important to note that these costs fall not only on the cases in the
Interest. I. History and Criticism of Theories of Interest.) Jena: Gustav Fischer, p. 268. 24 Guido Calabresi and Philip Bobbit. 1978. Tragic Choices . New York: W.W. Norton & Company. 163
queue, but are also borne by those not joining the queue. This phenomenon is not to be confused with the Austrian process of time-consuming roundabout production.
The idea that human decisions are not made with respect to medically relevant single aspects of one's health figures prominently in Austro-Marxism, another strand of thought that grew out of Austrian economics. In Marxist economic thought, matters such as health conditions are not a result of individual self-conscious and responsible decisions, but a consequence of the class situation in which people live, work, linger, and die. 25 People grow into or else opt for a particular lifestyle, a concept that in the Austrian tradition is called Lebenslage . It became extremely important when Otto von Neurath proposed a planned economy for Post World War I German countries. 26 Planning was to be done not in terms of setting prices, production or material goals, but in terms of physic lifestyles to be attained for and by the democratically constituted people. The policymakers' choice was then to choose among alternative lifestyles (Lebenslagen ) as a policy goal. Conceivably, one of the most important contributions of the Austrian School, Ludwig van Mises' Socialism (1922), was written in order to disprove the feasibility of this Austro-Marxist concept. 27 This again shows of how important it is to look at all the different Austrian contributions.
In the Principles ( op. cit. ), Menger has shown that choices have an intertemporal dimension where time preference is involved which differs between individuals, and in particular between groups of people. He considered a low subjective discount rate of persons as conducive to the cultural development of a nation. Menger's idea of individual choices is now part of mainstream economics; more precisely, it is the basis of the theory of opportunity costs. 28 Modern health economics is based on human capital theory in which the subjective rate of interest is the pivotal variable. 29
25 This is why the Marxist government of Vienna in the early Twenties excelled in architecture trying to change the objective living conditions of the working public. For instance, a single building complex, the street sight of which extends over one entire kilometer. Compare Mark E. Blum. 1985. The Austro-Marxists 1890- 1918. A Psychobiographical Study . Lexington, Kentucky: The University Press of Kentucky. 26 Jürgen Backhaus. 1979. Ökonomik der partizipativen Unternehmung . (The Economics of the Participative Firm). Tübingen: Mohr (Siebeck), p. 51. 27 Ludwig von Mises. 1981. Socialism . Indianapolis: Liberty Classics. (Translation of: 1922. Die Gemeinwirtschaft: Untersuchungen über den Sozialismus. Jena: Gustav Fischer.) Hayek writes in the foreword of the translation that "- the crucial section on economic calculation under socialism was in fact provoked by a book by Otto Neurath published in 1919, from which Mises quotes." p. xxi. 28 James Buchanan. 1966. Cost and Choice . Chicago: Markham. 29 The old health economics is essentially the institutional business economics of the nationalized British Health Care System. The human capital model, which is the basis of modern health economics, was developed by Gary S. Becker in 1964. After all, Becker is not an Austrian economist. The unit of analysis is the family and the goal pursued is joint maximization of utility. 1975 (2). Human Capital . New York: Columbia University Press. On the basis of his work, Victor 164
Böhm-Bawerk's original concept of capital as `waiting', that is abstaining from immediate satisfaction of needs and postponing consumption to achieve higher satisfaction at a later date, has turned out to be applicable in analyzing the lifestyle choices people make. Such choices can be interpreted as a type of waiting (giving up immediate satisfaction) with the goal to have a return on that investment in the form of a better health later on in life and avoidance of premature death. This issue will be discussed more closely in section 7.3.
7.3 The Role of the Subjective Discount Rate in Modern Health Economics
Choices of lifestyle often involve a comparison between the benefits of current consumption and possible negative health effects in the future. The adverse health consequences of a particular behavior do not afflict individuals with absolute certainty. Smokers are affected by a certain statistical chance of suffering various smoking- related diseases. As a negative externality, smoking might affect nonsmokers also with a certain statistical chance suffering from second-hand smoke. 30 People, who overeat or drink too much, face a similar dilemma. Skinny people have a lower lifetime risk of negative health effects and can expect to live longer than people who are overeating. Excess drinking is associated with a higher risk for accidents, personal deterioration, neglect of family responsibilities, and early death. Is giving up smoking, loosing extra weight and keeping it off, or stop drinking excessively worth the present effort and forgone pleasure of current consumption for an uncertain future health gain?
The picture is a more broad one and also concerns basic values. 31 Pertinent to the area of lifestyle choices are industrial and legal issues, and policies related to public health. 32 People are faced with multiple, conflicting, and often irreconcilable choices, when they make their lifestyle choices. The choice concerning obesity, smoking and alcohol (ab)use does not exhaust the set of lifestyle alternatives. People pick from a larger set, including behavior associated with obstructive stupidity, cruelty, extreme materialism, drug abuse (coke, heroine, crack), and other conditions such as driving tractors, lorries, certain sports that require constant painkillers, or workaholic behavior, to name but a few examples. Individual time and risk preferences are important for a
R. Fuchs has done empirical work. See, for instance, 1982. "Time Preference and Health: An Exploratory Study." In: Fuchs, Victor R. (ed.) Economic Aspects of Health. Chicago and London. The University of Chicago Press, pp. 93-120. 30 Walter Adams, James Brock. 1999. The Tobacco Wars . Cincinnati, Ohio: South- Western College Publishing, p. 54. 31 For instance, the Cameralists considered the lack of chastity as a reason for the spread of diseases and tried to promote this value. Compare chapter three on Cameralism. 32 Examples are taxes on alcohol and tobacco. An illustration of far-reaching consequences in the case of tobacco is given by Walter Adams and James Brock, 1999, op. cit. 165
person's choice. Some people value a current satisfaction much higher than a future satisfaction, and accept the higher risk of suffering from a future lifestyle-related disease. According to Menger, this kind of individual behavior does not bring about cultural development of a nation.
Mainstream economists assume that individuals act rationally in their choice of lifestyle. Given individual restrictions, they will increase the consumption of those goods and services that provide them the greatest marginal utility relative to the price they must pay. Negative adverse health consequences will raise the subjective price of that particular activity, and a person will engage in it, if the benefits outweigh the price. The question remains, however, whether a person is free in choosing a certain lifestyle. In the case of addiction, we cannot speak of a rational and voluntary individual choice. Yet, even addiction can be shown to be a rational choice in the long run. 33 A particular lifestyle is not an individual choice, if it is required as necessary behavior in a group. An example is the requirement of a certain professional behavior, but we can consider a person's decision to belong to that particular group a free and rational choice.
Differences in the choice of lifestyle of persons which lead to differences in their health status, can be explained in an extended human capital model. In the basic model, economists explain with reference to differences in investment in human capital differences in earnings among individuals and over the lifetime of a single individual. 34 If the model is extended, a variety of other phenomena such as lifestyle choices and health effects can be explained as well. A brief description of the basic human capital model follows, before we turn to the application at hand, an explanation of individual lifestyle choices in combination with health effects.
The term human capital is used in strict analogy with physical capital as an asset, which yields earnings over time rather than immediately, the net present value of the life time stream of income. Earnings can be pecuniary or nonpecuniary. An example is when human capital investments improve the health of employees, which leads to higher productivity of a company. This can occur directly by encouraging a healthy lifestyle or indirectly by providing on-the-job training. As employees become more knowledgeable, they are likely to become more productive and face less stress in their work. 35 The earnings here are partly pecuniary, consisting in lower costs for the company, and partly nonpecuniary, consisting in a higher level of well-being for the employees.
In the basic model, human capital can be created by activities such as formal education or on-the-job training, but also by forming networks with other people. A person investing in human capital cannot engage in other activities at the same time and might
33 Gary S. Becker and Kevin M. Murphy. 1988. "A Theory of Rational Addiction," 96, Journal of Political Economy , pp. 675-700. 34 Gary S. Becker. 1964; 1975 (2). Human Capital . New York: Columbia University Press. 35 As we have seen above, this case Böhm-Bawerk had in mind when presenting his lectures. 166
therefore forgo wage or other benefits. Such opportunity costs are part of the investment in human capital. Direct cost of acquiring human capital might consist in accepting a lower wage from an employer, who provides on-the-job training. If the on- the-job training consists in experience, an employee will not have to pay for it. 36 An employee will be reluctant to pay for human capital, if it is only applicable in the specific work environment provided by the employer as he cannot transfer specific human capital and translate it into a wage advantage when leaving the position. Similarly, the employer will be reluctant to pay for the creation of general human capital, which the employee can take elsewhere, possibly in return for a higher wage. 37
It is an assumption in the basic human capital model that people act rationally. Employees incur the costs for the creation of human capital only, if there will be higher earnings in return, and employers are only willing to invest in human capital, if they can expect a higher productivity by employees in the future. In analogy with the investment in physical capital, human capital investments require that there will be a repayment for the investment with interest, and this will be compared with the earnings of alternative investments of a similar risk. The higher the investment in human capital, the larger must be the present value of the anticipated earnings due to that investment or productivity gain. The additional earnings should be sufficient to cover the initial investment and to compensate for the "waiting" that was involved, the interest factor, in order to make the investment worthwhile as compared to alternative projects.
Truncation of the time horizon shortens the payback period and causes lower investments in human capital. Truncation of the time horizon could consist in proximity to death or retirement, in leaving a family, a company, a country, etc. An example is a young or middle-aged person newly infected with HIV, who knows that he has maximally ten more years to live, before his health deteriorates. Posner gathered empirical evidence on HIV infected persons. He has reported that lower investments in human capital can be observed, as well as a high rate of suicides; even before HIV infected persons develop AIDS. 38
Not all people do cut off investment in human capital despite approaching an horizon, for instance the authors of an autobiography who try to finish their work before they die. It can be astonishing, how much very sick people still can accomplish. This fact is usually not discussed in the health economics literature, but it can be explained in a human capital context. Posner has explained the phenomenon that people still invest in human capital despite approaching a horizon such as death, and despite diminished
36 This is different in the case of an apprenticeship, which will lead to a high qualification of the employee. 37 This is also a selection mechanism for employers to find those people, who have a low discount rate and whom they expect to be more productive than others. 38 Risk preferences have been assumed to be the same. Time and risk preferences are not independent, for instance in the case of combat troops with high risk components. They are highly educated, but chances to survive combat are very low. 167
health, with post-humous utility. ( Op. cit. , p. 58). If a person is altruistic towards family and friends, he or she might want them to benefit from his work; if he or she is more selfishly oriented he might want to install a good reputation for himself, which would also be a family asset.
When people are very close to a horizon, human capital economists speak of the last- period problem. Then, rewards and punishment as incentives for good behavior become irrelevant. An example is the drug-addicted HIV infected criminal, who threatens to infect people with AIDS. The period for punishment is too short to be a disincentive for his or her behavior. For a religious person there might not be a last period, as he or she believes in an afterlife, where his current behavior will be judged.
Human capital, like physical capital, depreciates, for instance by memory loss or through a change in the work environment which typically requires new knowledge and skills and reduces the value of the existing erudition and experience. (Posner, op. cit. , p. 53. Human capital can also depreciate due to bad health or aging of people. Aging often goes along with somatic and nonsomatic changes leading to a loss of memory, reduced dexterity, a lack of flexibility, and slower speed in learning and applying new skills. The question arises whether people will replace human capital lost by depreciation. If people would not change physically, they would consider the cost of the new human capital investment and compare the minimum payback period of this investment with the real payback period. The real payback period is the time left to work until they reach a horizon such as retirement or the time when they plan to leave the company. They would not undertake a human capital investment to replace human capital, if the minimum payback period would be longer than the real payback period. If the employer would pay for the human capital investment, he would also take the truncated horizon into account. If the assumption is dropped that people do not change physically, as is the case of diminished health, people might not be able to replace the knowledge lost, or not as easily as they used to, which increases the cost of acquiring human capital. They might find it more difficult to apply new knowledge, and perhaps by being confronted with a longer real payback period than the minimum payback period, they might decide not to replace losses of human capital due to depreciation, which might lead to net depreciation.
If the minimum payback period for some investment in human capital is twenty years, a person, who expects to be working for only ten more years will only invest those parts of human capital with a high return, or else use those parts of human capital, which will have a rate of return of ten years or less. He will thus behave different from someone who expects to be working for another thirty years. If the net depreciation of human capital causes a fall in real earnings, the employee has fewer incentives to remain employed. This explains the retirement decision under the assumption that the retirement age is flexible and for the employee to decide.
With regard to the formation of human capital to be expected in the future, and focusing on the United States, two developments are identified by Posner, which work in opposite directions. ( Op. cit. , p. 55). The trend of a rising longevity of Americans is well established and Americans can be expected to continue to live longer, which is partly 168
due to a better medical system and a general rise in the standard of living. Posner expects that additional healthy years will be added to the prime years, which will enable people to be active longer, before their health will diminish. A rise in the amount of human capital investment due to the longer payback period (retirement age is more flexible in the United States than in Europe) can be expected. At the same time, it can be expected that due to diminished health in old age these people eventually will need caretakers, but caretaking generally is a low-skilled job and will therefore lead to a fall in the investment of human capital. Some caretaking, of course, requires high medical skills, and therefore partly offsets the first effect.
Human capital is not only formed through formal schooling and on-the-job training, but also by personal relationships, which require the investment of time to develop into mutually beneficial relationships. In health economics, personal relationships are very important as sick people get help from family, friends, or neighbors, etc. Posner investigates the relational human capital formation of elderly persons. He has noted that people who reach old age are not a random draw of the population. His findings are that they have fewer friends than an average younger old person; they are typically of better health than average, more intelligent, more affluent, and better educated. Empirical studies show that health, age, income and education, are correlated with each other. A possible explanation for these correlation patterns lies in differences in subjective discount rates among people.
Victor Fuchs has explored the interrelationship between time preferences, individual behavior and health states of people. (1982, op. cit. ). He showed that people who have a low discount rate invest more in their long-term health than others. They incur higher costs in the presence for a better health in the future by smoking fewer or no cigarettes, eating less fat food, sticking to a diet, drinking less alcohol, exercising more, etc. Fuchs found that persons with a low subjective discount rate are typically of better health, belong to higher income classes and are better educated than people with a high preference for current consumption. His empirical study is based on Becker's theory of human capital investment ( op. cit. ), and on Grossman's empirical application of this theory to the relationship of health and education.39 Grossman has shown that the effect of schooling on health is statistically significant. It remains significant even after controlling for income and other variables. Additional schooling has a further positive effect on health. This seems to be in contrast to the income variable. The correlation between income and health status is strong at low levels, but tends to become weaker with a higher income. The association of schooling and health status is so strong that it appears in cross-sectional, as well as longitudinal studies, and in objective measurement of health status, as well as self-reported data. (Fuchs, op. cit. , p. 94). When controlling for income, the relation between health and schooling remains strong. In Grossman's interpretation, a person is the more efficient in producing health, that is, in choosing a healthy lifestyle, the better educated he or she is. Empirical evidence provided by epidemiological studies show the importance of lifestyle variables as
39 Michael Grossman. 1972. The Demand for Health: a Theoretical and Empirical Investigation . New York: Columbia University Press for the National Bureau of Economic Research. 169
determinants of health status and mortality.
Fuchs has explained different choices of lifestyle as the result of differences in the time preference of individuals who might have a different willingness or ability to undertake an investment in human capital. ( Op cit. , p. 95). His empirical study of 1979 is based on a response of 508 men and women aged between 25 and 64. Lifestyle variables used are cigarette smoking, dental visits, exercise, weight, and seat belt usage. Health status is reflected by three sets of indicators: first, self-reported health, second, a checklist of symptoms and diagnoses, hospital stays, physicians' visitations and use of drugs, and third, whether the respondent was able to walk or jog a mile. These measures are correlated among each other. Time preference is measured by asking the respondent questions on whether they prefer money now or a higher amount of money in the future. As a result, Fuchs has shown that for a measure of "excellent health" as dependent variable, the effect for time preference is relatively stronger and the effect for schooling relatively weaker.
Fuchs has tested two hypotheses. According to the first, time preferences are formed early in life and influence both, investments in education and investments in long-term health. People with a low subjective discount rate, which implies a relatively high willingness to defer immediate engagements, can be expected to invest in high levels of schooling and to choose more health-enhancing activities than people with a high subjective discount rate, who prefer a minimum of education and a not-so-healthy lifestyle. According to the second hypothesis which is not mutually exclusive with the first one, education affects time preferences. The higher educated a person, the lower becomes his or her subjective discount rate. Fuchs could not empirically distinguish between both hypotheses, but he was able to show that people with a low subjective discount rate tend to choose a healthier lifestyle and therefore make higher investments in their long-term health than people with a high subjective discount rate.
Fuchs ( op. cit .) has obtained values on time preference by asking people for interest rates, but a money-related measure might not reflect people's choices with respect to health-related activities. In 1988, Moore and Viscusi studied time preference of workers, who took a high risk of injury at their job, and observed discount rates of 10 to 12%. 40 Fabian has reported the results of a model, where individual health choices are placed in a life-cycle decision-making framework. 41 The model is applied to life- threatening illnesses with long latency periods. Fabian has suggested to directly measuring health behavior involving intertemporal choices. This could be done either by developing alternative life-cycle scenarios and letting people choose a certain scenario, but then the discount rate might remain implicit, or by contingent market experiments which would reveal the discount rate.42 The results obtained by Fabian
40 Moore, M. J. and Viscusi, W. K. 1988. "The Quantity-adjusted Value of Life." Economic Inquiry , 26, pp. 369-388. 41 Robert Fabian. "The Qualy Approach." In: Tolley, George, Kenkel, Donald, and Fabian, Robert (Eds.). 1994. Valuing Health for Policy. An Economic Approach . Chicago and London: The University of Chicago Press, p. 131. 42 "One way of doing this would be to derive qualy estimates for several health 170
show that people discount future health problems, and that in particular young people heavily discount health problems that are postulated to occur late in life.
An aspect generally not discussed in a human capital framework is that over a person's life cycle, time preferences can be different. (Posner, op. cit. , p. 58). Posner has observed that the elderly are typically more pessimistic and routinized than young people. Due to diminished health they can often only choose from a very limited set of alternative activities. As they do not interrupt the flow of time with as many activities as the young, time seems to pass by faster for them. Based on this observation, Posner has suggested that the subjective discount rate declines over the life cycle. We can expect a higher subjective discount rate for the young, who can choose from a larger set of alternatives to fill their time with, than for the old. (Posner, op. cit. , pp.70-73).
Why do we observe low subjective discount rates among the very old? Under the assumption that the subjective discount rate does not change during the life cycle a selection bias argument can be made. Only those people reach old age that have a low subjective discount rate, as they have made more investments into their long-term health than people with a high subjective discount rate. There might be an increase in subjective discount rates during the last-period, when there is little time left to live, but it depends on the strength of the bequest motive of the very old, how strong the increase will be.
7.4 Summary and Conclusions
Time plays an important role in Austrian economics. Planning ahead in the production process includes acquiring an education. Menger's example is that of a physician; it would be too late to acquire the education of a physician at the point of time, one is in need of one. In the consumption process, people might make errors with respect to the character or a good of need. The lower the cultural development of a nation, the more likely are imaginary goods and needs such as ineffective medicine or imaginary illnesses. In evaluating future needs, consumers often evaluate a short intense present pleasure as higher than their permanent well-being, sometimes even higher than their
conditions that explicitly pertain to the present. The second step is to arrange these health states in various plausible life-path scenarios. The sum of the qualys is a quality-adjusted life for each scenario. The implicit discount rate is zero. The next step is to present these scenarios to respondents with the time dimensions clearly stated. The disability time paths would differ considerably among scenarios. The respondent would compare them with each other and with a base-case scenario in which none of the disabilities appeared. Respondents would first rank the scenarios according to their preferences. They would then evaluate the scenarios in qualy terms ... The implicit discount rate would be obtained by comparing the quality-adjusted lives with the life path constructed by adding together the timeless qualys into corresponding life paths." (Fabian, op. cit. , p. 132). 171
own life, a behavior Menger considered as wrong. In order to encourage cultural development of a nation, Menger has recommended building up long production processes, in particular by focusing on knowledge accumulation.
Böhm-Bawerk focused on the relationship between human labor and health, which he saw as a factor contributing to health. He has further developed Menger's concept of capital; Menger interpreted human labor as a kind of capital that could be enhanced by better health. Böhm-Bawerk's concept of capital as `waiting' can be applied to interpret decisions involving health as investments in the form of abstinence from immediate satisfaction, thus building up health capital to be enjoyed in a later stage of life.
If we look further at the different Austrian strands, we find the Austro-Marxists who built on Menger's theory of individual errors and his psychological explanation of capital. They have focused on the differences of individual time preferences and developed the concept of Lebenslagen among which a central authority has to choose for its people. 43 Then, lifestyle choices are not a matter of providing information to individuals, who subsequently take their own choices, but of the concept of Lebenslagen . This overruling of individual choices has been criticized by Ludwig von Mises in his book of 1922, Die Gemeinwirtschaft , op. cit. , on which the Neo-Austrians based their views.
Health economics is not fully developed in Austrian economics, but a typical health economic study leading to health policy conclusions could gain from employing the Austrian approach. Health policy conclusions could become more realistic, if health economists would be aware of the differences of individual time preferences. In concluding, we can say on the one hand, that the choice theoretic foundation of the Austrian approach provides the concept of opportunity cost, which is at the heart of health related policy. On the other hand, applying the Austrian theory of capital and its related theory of production to the sector of health policy, for which it was clearly not designed, would lead to fruitful results. This however, is an important result itself.
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Chapter 8
Gustav von Schmoller (1838 - 1917):
Health Issues as Part of the larger Social Question
Contents
8.1 Introduction
- Gustav (von, 1908) Schmoller: his Life and Work
8.2 Schmoller's Analysis of Health Related Issues: Basing Solutions on Principles of Insurance
- Subsistence Economy of the Household
- The Labor Contract
- Measures of Poor Relief
- Social Welfare Legislation
- Insurance and Credit
8.3 The Translation of Schmoller's Approach into a Research Program
8.4 Summary and Conclusions
This chapter is based on my publication of 1997, "Historical Approaches to Health Economics." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered . Editor: Jürgen G. Backhaus. Marburg: Metropolis, pp. 445-471. 177
8.1 Introduction
Gustav (von, 1908) Schmoller: His Life and Work
In the nineteenth century issues of health and health care have been discussed from an economic perspective, especially by the German Historical School as exemplified by the contributions of Gustav Schmoller (1838 -1917). Schmoller treated health issues as part of the larger Social Question which had arisen when during Germany's industrial revolution farmers and workers had moved from the country to the cities to find employment in the new established and expanding factories. A proletarian class formed and dissatisfaction was high. The Social Question was a main concern to Schmoller. He had the idea to insure the major risks in workers lives. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop. Hereby, he considered health a central variable which had an influence in his proposals for economic policy. Schmoller created the scientific basis for the German welfare legislation in the 1880s. To this effect, he organized a professional think tank of his colleagues, the Verein für Socialpolitik . In this chapter, the focus is on health aspects in Schmoller's work.
Gustav Schmoller was born 1838 in Heilbronn and died 1917 in Bad Harzburg. 1 He was introduced to the cameral sciences early on by his father, a business administrator of the royal estates of Württemberg, who thus laid the foundations for his later development and interests. 2 Schmoller became familiar with large data sets and the application of statistical methods through his grandfather, who cultured plants on a large scale in order to study Mendel's law. In his later work, Schmoller systematically applied the statistical-empirical method to the social sciences. Based on empirical material, he arrived at theoretical conclusions. 3
Schmoller studied cameral sciences in Tübingen and wrote his doctoral dissertation in 1861. Charged by the chief statistician of the Kingdom of Württemberg and extraordinary professor at Tübingen, Gustav Rümelin (1815 – 88), Schmoller built from scratch the industry statistics for Württemberg. In 1864, he received a position at the University of Halle. On the basis of his statistical industry studies the usual requirement
1 The biographical notes are based on the entry by Horst Betz. 2001 "Schmoller." Editors: Walther Killy, Rudolf Vierhaus. Deutsche Biographische Enzyklopädie . Munich, K. B. Saur. Vol. 9, pp. 39, 40. 2 Nicolas Balabkins. 1988. Not by Theory alone... The Economics of Gustav von Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, p. 11. 3 The analogy between the empirical-statistical method in the natural sciences and its application by Schmoller to the social sciences has been worked out by Reginald Hansen. 1993. "Gustav Schmoller und die Sozialpolitik von heute." (Gustav Schmoller and Modern Social Policy). Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften . Heft 430. Berlin: Duncker & Humblot, pp. 111-182, see pp. 112-114. 178
of a habilitation thesis was dropped. 4 Schmoller's social-political interest became obvious in his treatments of the Workers' Question in 1864 and 1865. 5 In these treatments, he already stated the need of reforms in order to improve the situation of the workers.
Schmoller was a co-founder of the Verein für Socialpolitik in 1872 and took leadership for a long time. It was the expressed goal of the Verein für Socialpolitik to establish a research program that was not only theoretically oriented, but also applicable to social policy. Schmoller wanted to create an institution where the scientific discussion of social-political issues could take place. 6 By devising policies for encompassing welfare legislation, the Verein für Socialpolitik prepared the ground for Bismarck's welfare legislation in the 1880s. 7 The driving force behind this legislation was Schmoller who by creating a teaching and research program influenced others in adopting his method and subjects which is referred to as Schmoller's program.
In 1872, Schmoller accepted the chair at the newly founded University of Straßburg. As the editor of the Acta Borussica he was influential in writing the history of Prussia. When he became the editor of the newly founded journal Jahrbuch für Gesetzgebung, Verwaltungs- und Volkswirtschaft im Deutschen Reich (Annals of Legislation, Administration and Political Economy) which later became to be known as Schmoller's Jahrbuch , his first article was on the idea of justice in the economy. 8 In 1882, he
4 Zur Geschichte des deutschen Kleingewerbes im 19. Jahrhundert. Halle 1870. 5 Gustav Schmoller. 1864/65. "Die Arbeiterfrage." Preußische Jahrbücher . Berlin. Vol. XIV, pp. 393-424, and Vol. XV, pp. 32-64. 6 While it is no longer the expressed goal of the Verein für Socialpolitik to make contributions to social policy, it remains committed to the scientific discussion of policy-relevant issues which was Schmoller's main interest. Gernot Gutmann. 1993. "Gustav Schmoller und der Verein für Socialpolitik." Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 105-109, see p. 109. 7 Nicholas W. Balabkins. 1993. "Schmoller und der Stammbaum der nationalökonomischen Wissenschaft." (Schmoller and the Family Tree of Economics.) Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 19-26, see in particular pp. 21-23. 8 Although many authors see Schmoller's notion of social justice as a normative element and add it to his economics, Hansen proved that it is an integral element of his positive economics which he showed with respect to Schmoller's notion of income taxation. The source is Gustav Schmoller’s Rektoratsrede : "Die Idee der Gerechtigkeit in der Volkswirtschaftslehre." The speech has been translated into English: "The Idea of Justice in Political Economy." 1893/94. Annals of the American Academy . Vol. 4, pp. 697-737. Compare Reginald Hansen. 1997. "The Pure Historical Theory of Taxation." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and 179
received a call to Berlin and later was elected Rector Magnificus of the University. Schmoller was honored in many ways. In 1884, he became a member of the Prussian Council of State and in 1887, a member of the Prussian Academy of Sciences. He represented the University at the Upper House. In 1908, he was ennobled in recognition of the merits of his work.
Schmoller wrote many smaller works, before he wrote his magnum opus, the Blueprint , which was published in two volumes in 1900 and 1904 and in a second edition in 1923. 9 The Blueprint is the condensation of roughly four decades of lecturing. It is based on his earlier work such as his monograph on the weaver guild of Strassburg, from which emerged the "pattern of long-term evolution of economic and social institutions." 10 Schmoller's last larger work, a methodological contribution on the economy, economics and the economic method, never got published. In 1911 Schmoller edited and rewrote this work, but the contribution was deleted from the new edition of the Handbook of the State Sciences , which was published in the same year. This was due to principle methodological differences which also explain why a reprint of Schmoller's Blueprint did not appear before 1978. Methodological differences between Schmoller and Menger became to be known as the first Methodenstreit ,11 and between Schmoller and Max Weber as the second Methodenstreit .
Backhaus and Hansen have noted that these discussions threatened to question the scientific value of Schmoller's writings and even that of his lifework, the creation of the basis of the German social welfare legislation in the nineteenth century. 12 A fundamental change in methodology occurred when Max Weber's approach was adopted and not Schmoller's. Schmoller applied the empirical-statistical method to social-political questions. In contrast, Max Weber held that prejudices cannot be solved
Adolph Wagner Reconsidered . Marburg: Metropolis-Verlag, pp. 289-318, see in particular p. 291. 9 Gustav Schmoller, 1923 (second edition). Grundriß der Allgemeinen Volkswirtschaftslehre . Two volumes. ( Blueprint I and II). Munich, Leipzig: Duncker & Humblot. 10 Compare the discussion of Gustav Schmoller's monograph (1879, Strassburg) Die Strassburger Tucher- und Weberzunft. Urkunden und Darstellungen nebst Regesten und Glossar. Ein Beitrag zur Geschichte der deutschen Weberei und des deutschen Gewerberechts vom 13. - 17. Jahrhundert by Balabkins, 1988, op. cit. , p. 38. 11 Schmoller provided the basic concept for the legislation of the German income taxation in 1874. The first Methodenstreit had practical consequences for the current income tax legislation in Germany. This is the topic of the dissertation by Reginald Hansen. 1996. Die praktischen Konsequenzen des Methodenstreits . Eine Aufarbeitung der Einkommensbesteuerung. (Practical Consequences of the Methodenstreit ). Volkswirtschaftliche Schriften, Nr. 457. Berlin: Duncker & Humblot, p. 173. 12 Jürgen Backhaus and Reginald Hansen. 2000. "Methodenstreit in der Nationalökonomie." (Methodenstreit in Economics). Journal for General Philosophy of Science. Vol. 31, pp. 307-336, see p. 313. 180
empirically. Hence, according to Weber, the empirical-statistical method cannot be applied to social political questions. Schmoller's approach also stands in contrast to the current approach of health economics which is explicitly normative in institutional and policy assumptions and in the framing of research questions.
Despite these methodological differences, Schmoller's impact was far-reaching. The most succinct assessment of the impact of Schmoller's approach is given by Laidler who wrote: 13
Bismarck became a close student of this school and seized upon the program of Wagner, Schmoller and others and attempting at one and the same time to strengthen the state, undermine the social democratic movement and improve working conditions. The social legislation of the 70s and 80s in Germany was the result. 14
Graf Otto von Bismarck-Schönhausen (1815-98) introduced social welfare legislation and compulsory insurance acts in Germany. 15 Compulsory sickness insurance, of which the worker contributed two thirds and the employer one third of the funds, was passed in 1883; compulsory accident insurance in 1884. Compulsory old-age insurance of which the employee, employer and government shared the payment was adopted in 1889.
The question is pertinent, whether Bismarck's social policy influenced Schmoller. An answer is given by Schmoller himself, who noted that Bismarck's willpower was his most essential trait and that practical experience meant everything to him, but not theories. 16 In looking back, Schmoller evaluated his work on social insurance as
13 In tracing the impact of Schmoller and Wagner, Peter R. Senn reported about a paragraph-long section by Laidler on the influence on Bismarck. Laidler was an American socialist and one-time Director of the National Bureau of Economic Research, whose writings had a wide circulation. Peter R. Senn. 1997. "Problems of Determining the Influence of Schmoller and Wagner." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered . Marburg: Metropolis, pp. 34-141. See p. 100 and footnote 95. 14 Harry W. Laidler. 1927. A History of Socialist Thought . New York: Thomas Y. Crowell Company, p. 670. 15 The political consequences of social welfare legislation, and in particular its effects on the Social Question have been discussed by Marcel A. G. van Meerhaeghe. Draft 3-6-02. "Bismarck and the Social Question." Paper presented at the 15th Heilbronn Symposion on "The Social Question." June 23- 36, 2002. Publication forthcoming. 16 In order to answer the question whether Schmoller was influenced by Bismarck, John O'Brien translated four letters written by Schmoller on Bismarck, which were included in Schmoller's Charakterbilder published in 1913. He did not only look at social welfare legislation, but also at other issues such as the relationship between capitalists and landowners. The detailed discussion leads beyond the 181
follows:
In my three articles on the workers' question (1864, Preußische Jahrb .), I tried to show myself how the newer social institutions can have an effect in raising the standard of living of workers; I focused on the moral and economic, on the general education of the working class and on the education provided by the unions. In all of my later scientific work I tried to show that in our German states of civil servants a leading role in social policy falls to monarchy and civil servants. Practical life followed these paths, in particular through the initiative by Bismarck. 17
In the letters on Bismarck, Schmoller was less favorable. He wrote that Bismarck "criticized the workers too much," "was not fair to the growing, legitimate self- confidence of the lower classes," and "always criticized the civil service." (O'Brien, 1987, op. cit. , p. 19). He distinguished Bismarck's views on social legislation according to three different time periods.
However little practical happened at that time in Sozialpolitik , the fact is clear and confirmed in many ways that Bismarck's views until 1876 moved nearly in the same direction as the founders of the Verein für Socialpolitik , who independently of the government and without any closer knowledge of Bismarck's views had written on their banner in 1872 a vigorous, but moderate program of political social reform based completely on the existing social order... From 1876 onwards, a certain modification of Bismarck's views on social policy occurred in connection with the economic crisis and the growth of the Social Democrats' agitation ... In 1880, he himself took over the Ministry of Commerce and it was obvious that he rebuffed some individuals with whom he had previously dealt, excluded others, and ran the ministry most vigorously. 18
scope of this paper. John Conway O'Brien, 1987, "Schmoller's Briefe on Otto Fürst von Bismarck." Paper presented at the 14th Annual Meeting of the History of Economics Society . June 20-22, 1987. Harvard University School of Business, Cambridge, Massachusetts. 17 The original German quote reads as follows: "Ich selbst habe in meinen drei Artikeln über die Arbeiterfrage (1864 Preuß. Jahrb.) versucht zu zeigen, wie die neueren sozialen Institutionen auf die Erhöhung der Lebenshaltung der Arbeiter hinwirken; ich stellte die moralische und wirtschaftliche, die allgemeine und gewerkschaftliche Erziehung des Arbeiterstandes in den Mittelpunkt und suchte in allen meinen späteren wissenschaftlichen Arbeiten zu zeigen, daß in unseren deutschen Beamtenstaaten der Monarchie und dem Beamtentum die führende Rolle in der Sozialpolitik zufalle. Das praktische Leben ist dann diese Wege, vor allem durch Bismarcks Initiative, gegangen ..." Gustav Schmoller. 1923(2). Grundriß der Allgemeinen Volkswirtschaftslehre . Vol. II, ( Blueprint , II). Munich, Leipzig: Duncker & Humblot, pp. 349, 350. 18 O'Brien, 1987, op. cit. , p. 26, 27 (Translation of a letter written by Schmoller in St. Blasien, September 6, 1898). 182
Schmoller described the direction of influence as going from the founders of the Verein für Socialpolitik to Bismarck, but he noted that political constraints made him less and less a proponent of labor interests. When Bismarck took over the Ministry of Commerce in 1880, a change took place. Finally, Bismarck "did not become master of the labor movement which he promoted by the general right to vote," but "in times of great reconstruction, such movements and great social struggles cannot at any time be definitely and completely lacking" 19 Schmoller concluded towards the end of his letter that practice and science have to complement and correct each other as they cannot be both perfect.
Schmoller's contributions to health economics are often made in relationship to the Social Question which he wanted to relieve. In the Blueprint , he paid particular attention to health issues in the chapters on work contract and work environment and on new social institutions and welfare legislation 20 Schmoller's influence reached beyond his own program. He was influential in policy, not only through the Verein für Socialpolitik and his journal, but he was also supported by Althoff, the Prussian administrator of science in the Ministry of Culture (compare chapter nine). By both, Schmoller and Althoff, questions of health are always seen in the larger context of the economy.
8.2 Schmoller's Analysis of Health Related Issues: Basing Solutions on Principles of Insurance
Schmoller emphasized Christian Freiherr von Wolff's (1679-1754) importance for modern economics. Just like Wolff, he saw the individual as a dependent person, and not as an isolated human being. 21 Schmoller's "household" is similar to von Wolff's "house," because both are small economies by themselves. Schmoller defined "a household as a smaller or larger union of people who belong together and who share certain mental, cultural or legal values, who work for one another or partly with others outside the household." 22 The relevance to health economics results from the fact that the members of a household care for one another and that the household is important in the production of health. Individuals can belong to one or more households, but
19 O'Brien, 1987, op. cit. , p. 62. (Translation of a letter written by Schmoller in St. Blasien, September 16, 1898). 20 See Schmoller, Blueprint , II, 1923, op. cit ., chapter 7 on work contract and work environment (pp. 294 - 367), and chapter 8 on new social institutions and welfare legislation (pp. 367-481). 21 Jürgen Backhaus, 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics . Kluwer. 4, pp. 129-146. p. 130. 22 The original German quote reads as follows: "Wir verstehen unter einer `Wirtschaft' einen kleineren oder größeren Kreis zusammengehöriger Personen, welche durch irgend welche psychische, sittliche oder rechtliche Bande verbunden, mit und teilweise auch für einander oder andere wirtschaften." Schmoller, Blueprint , I, 1923, op. cit ., p. 3. 183
usually, each individual belongs to at least one family as a basic household.
Schmoller distinguished between economic and noneconomic activities that are performed in order to serve the satisfaction of needs. He defined those activities that are directed towards a higher goal than production as noneconomic activities. Examples include sports, walking, or care for health. There is an economic side to noneconomic activities, if people perform these activities in order to earn a living. (Schmoller, Blueprint , I, 1923, op. cit ., p. 3). All economic activities, whether they are paid or unpaid, contribute to economic production. With a rise in culture, Schmoller predicted that a higher part of the economic activity would take place in exchange for money.
A political economy comes about when enterprises become separate from family households. Hereby, a leading role is often played by technical development. Schmoller distinguished between static and dynamic aspects of technical development in order to explain social and economic change. 23 In a political economy people share similar customs, common legal rules, a central finance system, and a coherent and integrated system of infrastructure. (Schmoller, Blueprint , I, 1923, op. cit ., p. 5). According to Schmoller's view, a state is part of a highly developed political economy and forms the central household to all other households.
The relationship between the individual and society as a whole has been subject to discussion. 24 As a general principle, Schmoller propagated not just an increase in the wealth of a nation, but also an improvement in the nation's culture. He foresaw the possibility, as did Wagner, of not only economic development, but also cultural improvement including ethical refinement. In this context, improving health also implied improving longevity, but also cultural formation and civic virtues.
Already in his early articles of 1864, Schmoller proposed compulsory welfare legislation for workers so that families would not fall into poverty through illness. (1864, Preußische Jahrbücher, op. cit. ). In the second and revised edition of the Grundriß which appeared after Schmoller's death in 1923, he evaluated the experience of roughly twenty years of compulsory welfare legislation in Germany. On the basis of compulsory social welfare legislation, Schmoller intended to stimulate market forces so that a family household could further limit the risk it is facing through health (and other)
23 Schmoller's evolutionary approach is analyzed by Karl-Heinz Schmidt. 1993. "Ökonomie und Technologie." (Economics and Technology). Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Editor: Jürgen Backhaus. Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 261-274. 24 This is the topic of the dissertation by Athanasios Giouras. 1994. Arbeitsteilung und Normativität. Zur Rekonstruktion der Historischen Sozialtheorie Gustav Schmollers . (Division of Labor and Normative Issues. Towards the Reconstruction of the Historical Social Theory by Gustav Schmoller). Frankfurter Abhandlungen zu den gesamten Staatswissenschaften. Vol. 4. Frankfurt/Main: Haag + Herchen, pp. 70,71. 184
problems by buying insurance and by living on credit if needed. He looked at illness as a statistical phenomenon which is calculable so that health insurance markets could develop. 25
Schmoller stated that illness causes disruptions and costs to the family household, the more so, the smaller the family income and the more it depends on monetary wage. Coming irregularly and unpredictably, a family is not prepared to cover the costs caused by an illness out of its regular budget. Illness was in Schmoller's view a main cause of poverty. ( Blueprint , II, 1923, op. cit ., p. 402). As the principle elements of a system of worker insurance he considered the provision of health insurance (he looked at the legislation in the time span between 1883 and 1911), the provision of money income for a woman in childbed (this was already part of the health insurance), insurance in the case of death (which was even older than health insurance), accident insurance (introduced in 1885), and invalidity insurance (also a part of health insurance). Schmoller wrote that social insurance legislation in Germany also would not be complete without unemployment insurance. ( Blueprint , II, 1923, op. cit ., p. 449). In historical sequence, unemployment insurance legislation was not passed until 1927.
Subsistence Economy of the Household
Schmoller has observed that it is more urgent to have worker insurance in some regions and at certain points in time, and he has found at the same time that the need for worker insurance is generally less pressing if a subsistence economy is present. The subsistence economy of the family household forms a major source of income and gives stability to the household, for instance if the household is struck by a case of illness. (Schmoller, Blueprint , II, 1923, op. cit ., p. 401).
Schmoller defined illness as an unforeseen interruption of the working ability, which could have devastating effects on the production and income of a family household. The effects of illness on the subsistence economy of the household would depend on which member of the household would get sick. (Schmoller, Blueprint , II, 1923, op. cit ., p. 402). In case of illness of the mother, the subsistence economy of the family would suffer by a shortfall in household production resulting in neglect. This was the worse, if there were small children and no servants helping in the household. In case of illness of the father, who at that time mostly was the main breadwinner of the family, the economic basis of the family was threatened by the absence of a major source of
25 In looking at the difference in behavior of groups of people who are entitled by certain rights and other groups of people who are insured, Pennings saw the modern importance of Schmoller. Schmoller was in favor of the insurance solution. Compare Frans Pennings. 1997. "Is Schmoller's View on the Principles of Social Security Still Relevant in Present Debates on the Future of Social Security?" Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 595-616. 185
income, so that the family could fall into destitution.
Schmoller saw the wife's responsibility primarily with respect to the family household. He was in favor of female education, as long as it helped her to fulfill her role as a care provider. 26 Since Schmoller argued from the point of view that the household was actually to be seen like a small firm the complexity of the task of its managers should not be underrated. Herkner built on this view, and, in his inaugural lecture, emphasized the importance for women to study economics. 27 Herkner saw essentially three reasons for women to study economics; first, understanding market operations certainly befits the manager of a firm or household; second, economics had just been established as a teaching subject. Having a degree in the discipline meant having recourse to an outside income should the major breadwinner prematurely die or fall terminately ill. Third, Herkner, as did Schmoller, saw economics as an inherently emancipatory scholarly discipline.
Schmoller was concerned that households based on a small subsistence economy would offer resistance to the introduction of compulsory social welfare services, or, if a compulsory health insurance was already in place, then he feared that those households might stop investing or saving and therefore become more vulnerable again. If a household with a small subsistence economy has to pay compulsory health insurance, then it faces in its budget decision the following alternatives: spend the money available, invest the money in the subsistence economy, or put it in a bank savings account. Schmoller thought that it might be likely for such a household to decide against investing in the subsistence economy and against putting the money in a bank savings account. The empirical evidence suggested that the German worker insurance system, an overwhelmingly compulsory system, coexisted next to a strong Savings and Loan Sector. On the ground of empirical facts he concluded that his concern was not justified. 28 Even if a compulsory health insurance was in place, households with a subsistence economy tended to continue to invest or save.
The interdependency of Schmoller's approach can be illustrated in the example of the subsistence economy. His proposals for income tax legislation and social welfare legislation are not unrelated to each other. The subsistence economy provides a source of income to the household which Schmoller wanted to include in his concept of income. According to Schmoller, people should pay income tax according to their real
26 Irmintraut Richarz. 1991. Oikos, Haus und Haushalt. Ursprung und Geschichte der Haushaltsökonomik . (Oikos , House and Household. The Beginning and History of Household Economics). Göttingen: Vandenhoek & Ruprecht, p. 227. 27 Heinrich Herkner, Inaugural lecture, Zurich, October 29, 1899. Das Frauenstudium der Nationalökonomie . (Womens' Study of Economics). Berlin: C. Heymann, 1899; and in: Brauns Archiv für soziale Gesetzgebung und Statistik . (Brauns' Archive of Social Legislation and Statistics). Vol. XIII, 1899, pp. 227-254. 28 In Germany, Schmoller was looking at empirical evidence of roughly twenty years. He also included the experience of other countries such as England and France. Schmoller, Blueprint , II, 1923, op. cit ., p. 402. 186
standard of life. 29 This means that beyond monetary income it was important to include the components of nonmonetary income. In order to estimate people's real income one had to look, for instance, at the value of living in a large house and park area, or the value of a garden, as well as extraordinary returns. Schmoller proposed the income tax reform in Saxony that was introduced between 1874 until 1878. (Hansen, 1996, op. cit. , p. 57). Hansen described the reform of the income taxation as the centerpiece of the new institutions of social welfare legislation as it was directed towards providing stability to households.
The Labor Contract
Reviewing the development of the economy from a feudal economy to a modern economy based on monetary exchange, Schmoller observed that a deep transformation of the way, work is organized took place. Obviously, the lord of manor did not conclude individual labor contracts that could specify health related auxiliary services and duties. The whole system of the division of labor was rested in a paramount exchange of a duty's services and fees which were not individualized, but based on immutable conditions such as houses, farms, etc. Industrialization went along with urbanization and the freedom to enter individual labor contracts. Now, all the prior duties (Nebenpflichten) had to be negotiated separately and often could not. Urbanization brought about new health conditions and notably risks which had neither been embedded in the old system, nor could they be immediately cast into new contractual forms. Here, the labor contract showed a gap between what had traditionally been taken care of in a different system and what now had to be dealt with under different circumstances of habitual relations, customs, religion, the role of law, and technology.
As we concentrate on the effects of health, we are mainly interested in Schmoller's treatment of other aspects of the labor contract, but the wage level. (Schmoller, Blueprint , II, 1923, op. cit ., p. 307). Here, Schmoller gave two examples where he illustrated possible health effects. First, he pointed out the consequences for health of a law, which no longer allowed employees to be paid in commodities or to receive credit for commodities, and secondly, he described the health consequences of the pieces wage.
Schmoller warned of the unintended consequences, when abolishing the in-kind-wage
29 Gustav Schmoller. 1863, "Die Lehre vom Einkommen in ihrem Zusammenhang mit den Grundprinzipien der Besteuerung," (The Doctrine of Income in Relationship to Basic Principles of Taxation), Zeitschrift für die gesamte Staatswissenschaft , 19. Jg., Tübingen, pp. 1. For a summary and comparison to Wagner's concept see Reginald Hansen. 1997. "The Pure Historical Theory of Taxation." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 289-318. 187
and the possibility to receive credit for commodities. In the beginning of the nineteenth century it was still customary in Germany to pay wages or part of the wage in commodities. This was a remnant of the old direct exchange and extended family economy which was on the decline. Credit could also be received in the form of commodities which was particularly important in the agricultural sphere. However, widespread defraud had become common; for instance the practice not to pay workers in money, but in chips redeemable only in factory shops, or to offer expensive and useless goods or goods manufactured by the employer himself instead of paying wage. Complaints about abuse of this wage system led to legislation prohibiting the wage-in-kind and restricted the possibility to receive credit in the form of commodities.
The difficulty when putting this legislation into practice is the following. On the one hand, employers are neither allowed to pay wages in commodities, but only in money, nor are they allowed to provide credit to their workers in the form of commodities. (This concerns either all employers or only those employers, who are in manufacturing.) On the other hand, for practical reasons one has to allow employers to provide the workers with housing, heating, use of land, regular meals, medicine and medical help, as well as tools and fabrics, at reasonable prices. 30
This shows how Schmoller critically looked at regulations directed at industry, but also affecting the (barely) developing agriculturally based industrial sector, the development of which he did not want to be suffocated by regulations extraneous to this sector. The analytical result is achieved by looking at typified agents of all the relevant sectors and their concomitant relationships. Not shown in the quote is the empirical base, on which the conclusion rests. Schmoller not only considered the payment relationship, but also availability of credit. The possibility to receive credit is truly important in an unforeseen emergency or illness, especially when there is no other safety net.
The second example where Schmoller noted possible health effects was the introduction of the pieces wage. In this example, Schmoller explicitly excluded the wage level from consideration. His empirical industry studies showed that the pieces wage tended to increase output tremendously, but that at the same time a decline in quality would take place and health problems among workers would increase. He concluded that it would not be desirable to introduce the pieces wage to all industries and specified the conditions under which the disadvantages of the pieces wage could be overcome by retaining its main advantage, an increase in output produced.
Schmoller noted that the pieces wage is the wage form of capitalist production
30 The original German quote reads as follows: "Das Schwierige der Ausführung liegt darin, daß man den Arbeitgebern (sei es allen oder nur den gewerblichen) zwar verbietet, den Lohn in Waren zu zahlen statt in bar, den Arbeitern Waren zu kreditieren, daß man ihnen aber aus praktischen Gründen gestatten muß, den Arbeitern Wohnung, Feuerung, Landnutzung, regelmäßige Beköstigung, Arzneien und ärztliche Hilfe, auch Werkzeuge und Stoffe zu angemessenem Preis zu liefern." Schmoller, Blueprint , II, 1923, op. cit ., p. 323. 188
characterized by large factories and relative stability of technical and economic development. His goal was to keep the incentives provided by the pieces wage, but to overcome the negative effects with respect to health and lower quality of output produced. He suggested a combination of time and pieces wage, similar to a railway engineer who receives a basic monthly salary and extra money per mile driven, or to a professor who is paid his salary and who in addition receives lecture fees from students. (Schmoller, Blueprint , II, 1923, op. cit ., p. 326).
Schmoller noted that the pieces wage came into existence "where the workers were not part of the house of the master." 31 In modern economics such a relationship is typically explained in an Alchian-Demsetz model. 32 In a small group, such as a family or small firm, one group member knows more or less what the other one does. Through this implicit form of monitoring and control, the problem of quality control is not prevalent. In addition, the head of household knew that he or she had to care for the workers and was therefore not interested in pressing them to achieve a maximum of output without consideration of health care costs. The traditional family which included several generations and even the workers and their families who were helping in the household and who provided care to those family members who needed it, resembled a small group as described by Alchian and Demsetz.
Schmoller has observed that in a factory setting, where the pieces wage has been introduced, the employer shows less responsibility for his workers' fate, not only in times of distress, but in general. Too much work, at too high a speed, sometimes in an unhealthy work environment, is demanded so that workers' health is being jeopardized. Vice versa, the workers show less commitment to their work and tend to produce goods of lower quality. (Schmoller, Blueprint , II, 1923, op. cit ., p. 324). He concluded as follows:
The most important step has been done, when and where the employers become so far-sighted that they recognize how dangerous and damaging a decreasing standard of living is for the workers; when and where the social responsibility of the workers has grown so much, through organization, a growing self-awareness, and a better education that they fight deliberately and energetically against the worsening of their living standard. 33
31 Der "Akkord- oder Stücklohn" entstand dort, "wo die Arbeiter nicht Familiengenossen des Herrn" waren. Schmoller, Blueprint , II, op. cit ., 1923, p. 324. 32 Alchian, Armen A., and Harold Demsetz. 1972. "Production, Information Costs, and Economic Organization." American Economic Review , 62, no. 5: 777-95. 33 The original German quote reads as follows: "Das Wichtigste is gewonnen, wenn und wo die Unternehmer endlich so weitsichtig werden, daß sie die Gefahr und den Schaden sinkender Lebenshaltung einsehen, wenn und wo das soziale Ehrgefühl der Arbeiter durch Organisation, durch wachsendes Selbstbewußtsein, steigende Bildung so geweckt ist, daß sie mit Bewußtsein und Energie gegen die Verschlechterung der Lebenshaltung kämpfen." Schmoller, Blueprint , II, 1923, op. cit ., p. 353. 189
Here lie the historical roots of the German system of Worker Co-Determination. The idea behind is that workers, who have a possibility to express their interests, will be more loyal to the company in the long run. They will make personal investments with a longer time span, and also expect their employment relationship with the company to be stable. In general, they will have an interest in maintaining a high quality of output in order to secure their own position. They will have an interest in a healthy work environment.
Measures of Poor Relief
Schmoller showed that injury and sickness were the two major reasons for poverty. (Schmoller, Blueprint , II, 1923, op. cit ., p. 380). Therefore, measures of poor relief had to concentrate on the control of injury and sickness among the poor which was either possible by institutionalized care or by care at home.
Schmoller described the English experience of poor relief, where needy people from all kinds of groups, the sick, the elderly, beggars, etc., had been brought together in a single workhouse. This experience he evaluated as very costly as different incentives for the people of each group are required to bring them back into a regular working life.
The data show that quite different types of poor have to be distinguished. Their needs differ and hence, the kind of help to be provided has to be suitable to the needs of each group. Here, the most important difference [to hospitalization, my add., U. B.] is that certain types of poor are supported best by leaving them in their family household and subsistence economy, and supporting them by relieving their work at home through goods and services needed, (for instance those people who are only temporarily in need; or those, who are only slightly sick; or widows with children, who still earn some money). Others (for instance, the seriously ill, the insane, the blind, and the elderly, who have no family) should be hospitalized in special institutions adapted for the purpose at hand. 34
Providing relief at home can be the cheaper alternative as compared to institutionalized
34 The original German quote reads as follows: "Nach diesen Angaben sehen wir schon, daß es sich um sehr verschiedene Arten von Armen handelt, daß das Bedürfnis und die Art der Unterstützung sehr verschieden sein müssen. Und der wichtigste Unterschied, der uns entgegentritt, ist der, daß gewisse Arten von Armen (z.B. die vorübergehend in Not Befindlichen, die Leichtkranken, die Witwen mit ihren Kindern, die noch etwas verdienen) am besten so unterstützt werden, daß man sie in ihrer Familien- und Hauswirtschaft beläßt und diese ihnen nur durch gewisse Gaben erleichtert, daß man aber andere (z.B. die schwer Kranken, die Irren, die Blinden, die ganz alleinstehenden alten Leute) in besondere hierzu eingerichtete Anstalten bringt." Schmoller, Blueprint , II, 1923, op. cit .,p. 381. 190
care. Care at home kept the relations to family, employers, church, and other associations intact, and the obligation of those groups to provide for their members. Schmoller thought that the existence of a subsistence economy kept people from easily falling into poverty. Hence, his plea for help with the subsistence economy in case of sickness.
Bringing people into institutions as opposed to supporting them at home requires an administration and appropriate buildings. While it is more expensive than care at home, it breaks up family and other relationships of the institutionalized offering an environment that might be more appropriate for some persons belonging to specific groups. For instance, forced reeducation can only take place in an institutional environment. Schmoller rejected the idea of forced reeducation of the poor, because it hurts individual freedom. He thought that radical socialists, who propagated the idea of forced reeducation, were too optimistic about the success of forced reeducation as a measure of poor relief. 35 In his view "the discussion between open and closed care, family and institutional care is ... at the same time a discussion about the large principles of organization of the economy." 36 His goal was to provide help which at the same time educated and raised the individual to a higher cultural level while keeping individual freedom intact. (Schmoller, Blueprint , II, 1923, op. cit .,p. 374).
After listing several arguments against hospitalization, including a bad reputation of institutionalized care due to high costs and abuse, an observation, Schmoller based on the time span between 1500 and 1700, he argued that "only in large institutions it is possible to introduce all kinds of technical advances in treatment of illnesses, but also in heating, lighting, food preparation, as well as in teaching and hygiene..." 37 Due to the implementation of such technical inventions properly executed institutional care might be the better alternative, but it is more expensive than open care. Hence, only selected categories of the poor should be admitted to larger, well administered institutions.
Schmoller was aware of the danger of infection and gave childbirth as an example, where hospitalization is not recommended. 38 "Hospitalization of all pregnant poor
35 According to Schmoller, radical socialists had a preference for institutionalized care, because it allowed forced reeducation. Schmoller, Blueprint , II, 1923, op. cit .,p. 381. 36 The original German quote reads as follows: "Das prinzipiell Wichtige an dem Streit zwischen offener und geschlossener Pflege, Familien- und Anstaltspflege ist es, daß er zugleich einen Streit um die großen Organisationsprinzipien der Volkswirtschaft darstellt." Schmoller, Blueprint , II, 1923, op. cit ., p. 381. 37 The original German quote reads as follows: "Einmal konnten alle möglichen technischen Fortschritte in der Krankenbehandlung, dann aber auch in Heizung, Beleuchtung, Nahrungsmittelbereitung sowie im Unterricht, in der Reinlichkeit nur in großen Anstalten leicht durchgeführt werden ..." Schmoller, Blueprint , II, 1923, op. cit ., p. 385. 38 In the Netherlands, childbirth at home is common. Dutch midwives are responsible for regular check-ups of healthy pregnant women and assist with giving birth at home. For the first week or so, nurses check on mother and baby 191
women is entirely wrong; it is much better to help them with home nurses in their family economy; only those women, who face special complications with childbirth, should be admitted to hospitals." 39
Schmoller propagated institutionalization as a measure of poor relief only in specific cases. He argued that support and care at home are both, less costly and more efficient; only if that was not possible, or if specific technical procedures were required hospitalization should take place.
Social Welfare Legislation
In the process of the transition to an industrial society, the wage sometimes fell under the level of what was needed to live on. 40 This was one reason for the introduction of basic welfare institutions including compulsory state health insurance.
The newer worker insurance system which first developed in the hands of free cooperatives, then under compulsory state cooperatives, resulted from the imperfection of the entire older poor relief system, and from the low wage level; it presents itself as an improved effort to provide a substitute income for the sick, invalid, old, or unemployed workers who cannot earn a wage due to an accident or a natural handicap. 41
Schmoller was in favor of basic social welfare legislation on a case-by-case basis, but he was not an advocate of an all encompassing welfare state. (Schmoller, Blueprint , II, 1923, pp. 349, 350). In reviewing the discussion of the right of existence, the right of labor, and the right to the full value product of labor, Schmoller clarified his own
at home and there is also help in the household. Prenatal mortality in the Netherlands is lower than in Germany and the United States, where hospitalization is the rule. Thus, childbirth at home is to be preferred. 39 The original German quote reads as follows: "Wöchnerinnenasyle für alle gebärenden armen Frauen sind grundfalsch: viel besser ist, ihnen Hauspflegerinnen für ihre Familienwirtschaft zu stellen; nur diejenigen armen Frauen, bei deren Geburten besondere Gefahren bestehen, gehören in Asyle." Schmoller, Blueprint , II, 1923, op. cit ., p. 386. 40 Only extreme liberals declared any public help to the poor as wrong. Schmoller, Blueprint , II, 1923, op. cit ., p. 344. 41 The original German quote reads as follows: "Das neuere Arbeiterversicherungswesen, das zuerst in den Händen freier, dann in denen staatlicher Zwangsgenossenschaften entstand, war die Folge der Unvollkommenheiten des ganzen älteren Armenwesens und der Niedrigkeit der Löhne; es stellt sich dar als ein verbesserter Versuch, den kranken, invaliden, alten oder arbeitslosen Arbeitern, die infolge von Unglück und natürlicher Behinderung keinen Lohn haben, ihn zu ersetzen." Schmoller, Blueprint , II, 1923, op. cit ., p. 344. 192
position. With respect to the right of existence he wrote:
The essence of the matter is that this so-called right of existence as a general vague idea gets only meaning and justification in the limited efforts to shape concrete help for certain cases, in which the modern money wage system fails. 42
Schmoller saw social status as a potential objective of social policy. He did not take the social stratification he found in the rapidly industrializing empire as given. Since the process was in motion, it could also be influenced by such forms of social policy (legislation) which by creating new life chances would have wealth effects for the lower income groups without redistribution. Thus he thought to defuse class struggle postulated and intended by Marx and Engels, with the effective agitator in the person of Ferdinand Lassalle.
As a more narrow right than the right of existence Schmoller described the right of labor. Schmoller rejected a right of labor, because it restricts market forces too much. He noted that Bismarck adopted the right of labor from the General Prussian Common Law. (Schmoller, Blueprint , II, 1923, op. cit., p. 344). Between 1881 and 1889 Bismarck introduced a social welfare system and compulsory insurance acts in Germany. Unemployment insurance legislation, however, was not passed until 1927. With social welfare legislation, Bismarck intended "... to reconcile the majority of the workers with the existing order of the state. This will lead to harmony between the interests of the workers and those of the employers." 43 Bismarck considered it as a duty of the state to provide employment possibilities, if able workers could not find work; he wanted to protect people in case of illness and accidents, and to provide for old age.
Give the workingman work as long as he is healthy," he said, "assure him care when he is sick, insure him maintenance when he is old .... Is it not established in our social relationships that the man who comes before his fellow-citizens and says, `I am healthy, I desire to work, but can find no work,' is entitled to say also, `Give me work,' and that the state is bound to give him work?" Germany, and particularly Prussia, now embarked extensively upon a policy of governmental
42 The complete quote reads as follows: "Das Wesentliche ist, daß dieses sog. Recht auf Existenz als ein allgemeines vages Ideal nur Sinn und Berechtigung gewinnt in den begrenzten Versuchen einer Ausbildung konkreter Hilfen für bestimmte Fälle, in denen das moderne Geldlohnsystem versagt." Schmoller referred to the right of labor as a more narrow right than the right of existence. He noted that Bismarck adopted it from the General Prussian Common Law. Schmoller, Blueprint , II, 1923, op. cit. , p. 344. 43 Letter by Bismarck (11-17-1871) to the Minister of Commerce, Count Itzenplitz, who was against state intervention and who opposed the introduction of social welfare legislation. Quoted according to Rolf Rieß. "Worker Security and Prussian Bureaucracy: A Meeting in the Prussian Ministry of Commerce." Essays on Social Security and Taxation . Jürgen Backhaus. Editor. Marburg, Metropolis. 1997, pp. 143-171. p. 148. 193
ownership of industrial enterprises, while for the protection of the workingman against accident, sickness, and old age an extensive series of compulsory insurance acts were adopted (1883-89). 44
Bismarck did not expect that the Social Question could be solved within a generation or two. (Van Meerhaeghe. Draft 3-6-02, op. cit ., p. 2). With the introduction of social welfare legislation he wanted to gain support for the Conservatives, and weaken the position of the Socialists. It is sometimes suggested that Bismarck bought off the working class by offering the social state. If the bribe was convincing, and the support forthcoming, one should not take issue with distracters who describe the policies as a bribe. 45 The facts speak for themselves with high immigration of workers, high fertility in working class families and dramatically rising income and health levels. 46
More interesting is the question of who influenced Bismarck to introduce these complex policies. Social historians have not succeeded in showing a direct link between Schmoller's activities, the research work of the German Economic Association (Verein für Socialpolitik), the legislative proposals and the legislation ultimately adopted. 47 But as in the case of the German Civil Code, 48 once a piece of legislation is in place, the implementation is controlled by the commentary literature as von Gierke to this very
44 Compare the entry on "Bismarck-Schönhausen, Karl Otto Eduard Leopold, Prince (1815-98)" in The New International Encyclopedia , New York: Dodd, Mead and Company, 2nd. ed., Vol. III, 1923, p. 336. The source of the quotation is not made explicit, but most likely it was from: Ashley, Social Policy of Bismarck , New York, 1913. 45 The discussion, whether Bismarck's social welfare legislation can be derived from his remarks to stop the socialist movement goes beyond the topic of this chapter. Compare Rolf Rieß, op. cit., p. 149. 46 Elections took place regularly, but only tax-paying persons had the right to vote. By imperial law, women suffrage was introduced in 1908. International Encyclopedia of the Social Sciences . New York: Dodd and Meade. 1923. Vol. 23, p. 679. 47 Social historians have shown indirect links such as Rolf Rieß (1997, op. cit .), who documented the influence of Schmoller and other members of the Historical School on politics by analyzing archival material of a meeting in the Prussian Ministry of Commerce on state security. Another example is the contribution by Eckart Reidegeld, who reported that Schmoller himself stated that reforms towards compulsory social insurance were well underway, before Bismarck put them in practice. "Schöpfermythen des Wilhelminismus: Kaiser und Kanzler an der "Wiege des deutschen Sozialstaates." (Myths of Creation of the German Welfare State). In: Lothar Machtan. 1994. Bismarck's Sozialstaat. Beiträge zur Geschichte der Sozialpolitik und zur sozialpolitischen Geschichtsschreibung . (Bismarck's Social State). Frankfurt, New York: Campus, pp. 261-279, in particular p. 270. 48 Jürgen Backhaus. Editor. 1999b. The German Civil Code of 1896. European Journal of Law and Economics . Volume 7, Nr. 1. 194
day determines the way the German Civil Code is being applied. 49 It was Schmoller who set out a theoretically coherent framework which could be taught and allowed to understand the complex interdependencies between the different new social institutions. 50
Schmoller himself thought that the Verein für Sozialpolitik had found the right bridge between socialism and liberalism and through its publications contributed to the solution of the social question . Their historical research showed that the cultural and economic rise of the lower classes was higher under strong monarchies than under weak and oppressing governments. A monarchy with an enlightened civil service should be given the leading role in order to lay the political ground works for building up the necessary social institutions. Schmoller noted that the scientific work of the Verein für Socialpolitik on social and economic matters influenced German policy, in particular Bismarck's proposals, and that it shaped the character of the German state sciences between 1860 and 1914. (Schmoller, Blueprint , II, 1923, op. cit. , p. 349).
Insurance and Credit
In the eighth chapter of the Blueprint , Schmoller analyzed the major social institutions, in particular with respect to a reduction of poverty and improvement of the health status of the lower classes. He showed that in the lower classes, illness leading to unemployment is a main reason of poverty. A system of insurance and credit is desired that allows for social upward mobility of workers and that protects them from falling into poverty in the case of illness.
A look at the historical development of welfare legislation shows how Schmoller arrived at his theoretical position. He described that in stages of primitive culture, children born unwanted and old people were killed and the dying sick left behind on the trails. When family-like groups and patriarchal family structures developed, he noted that "help in sickness and need was provided only within the families and small family-like groups and mostly the price was submission to the patriarchal structures." 51 The communities became larger due to an increase in mobility and growth of population, and the smaller units dissolved. With the introduction of money wage, the security provided in an
49 Jürgen G. Backhaus. 1999. "Otto von Gierke (1841-1921)." The Elgar Companion to Law and Economics . Jürgen G. Backhaus. Editor. Cheltenham, UK: Edward Elgar, pp. 313-315. 50 Gustav Schmoller. 1923. Grundriß der Allgemeinen Volkswirtschaftslehre . Second Part. (Blueprint, II). Munich, Leipzig: Duncker & Humblot. Chapter 8. "Die wichtigeren neueren sozialen Institutionen." (The Major New Social Institutions), pp. 367-481. 51 The original German quote reads as follows: "Dabei ist nicht zu vergessen, daß es nur innerhalb der Familien und kleinen Verbände eine Unterstützung in Krankheit und Not gab, und zwar meist um den Preis gänzlicher Unter- oder Einordnung der einzelnen in sie." Schmoller, Blueprint , II, 1923, op. cit ., p. 374. 195
exchange economy cease to exist. The larger political units developing, the states did not have the means to take care of their members, and the phenomenon of poverty of the masses arose. Schmoller saw the explanation for mass poverty in the technical and organizational development of institutions which was lagging behind the other movements.
There have been exceptions of states and larger political units trying to provide help at least to some groups of needy people. Schmoller described several such efforts, among them the welfare scheme of the so-called full citizens of Athens who received benefits; or the early welfare system by the Jews, who engaged in charities. (Schmoller, Blueprint , II, 1923, op. cit ., p. 375). The Christians took over the Jewish system. Schmoller described the early examples as responsible approaches to poor relief taking place on a case by case basis, but after the Christian religion became the religion of the states, he criticized that "... the way they gave care to the poor was already in the Roman Empire such, that it almost more promoted than alleviated poverty." 52 Bishops and clerics did not require individual proofs of need, but uncritically entered names to clerical lists of the poor. In the process, large foundations, hospitals, and other social institutions were founded to serve their needs. This came to an end during the thirteenth and fourteenth century, when the number of beggars and wandering unemployed increased drastically. When the church refrained from poor relief, public welfare took its place. In the beginning, their efforts were often not better than those of the church, but Schmoller noted that there were some exceptions; for instance the well documented poor relief measures taken by the city of Augsburg between 1459 and 1512. In concluding the historical overview and on the basis of what he saw as an efficient solution, Schmoller formulated his own theoretical position.
Not without mentioning that eventually the market will provide a better solution through development of the insurance system, Schmoller proposed to put welfare legislation in the hands of the local communities, where well-able and prominent civil servants should take care of the poor according to clear principles of administration. 53 Only those public or small public units (communities) should be responsible for social legislation which have also the right to raise taxes as they have the information required to make just decisions. "Only their poor relief distributes the burden evenly and fair among all citizens; especially among those with higher incomes; only this kind of
52 Die Christen predigten das Prinzip zur Armenplege. "Aber die Durchführung geschah schon im römischen Reiche in einer Weise, die fast mehr zur Förderung also zur Linderung der Armut beitrug." Schmoller, Blueprint , II, 1923, op. cit . p. 375. 53 Schmoller notion of bureaucratic behavior was different from the one we have today. When Schmoller referred to the civil service, he did not think of a bureaucratic organization. An example of the Spanish health care system, which suffers from failure of bureaucracy, is given in the contribution by Benito Arruñada. 1997. "Designing Markets versus Bureaucracy in the Reform of the Spanish National Health System." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Backhaus, Jürgen. Editor. Marburg: Metropolis, pp. 429-444. 196
care reaches all the poor." 54
Poor relief should be entrusted to local community governments, because they can better control the poor than state governments. They have the informational basis to judge if help is no longer required and accordingly can cease to provide public support. Schmoller warned that this kind of direct control would get lost if public poor relief would be administered at the national level.
Public poor relief [at the national level, my add., U. B.] would be much more of a communist rule than local community poor relief. Every one of the poor would try to get as much as possible from the common pot without giving something in return and the sense of responsibility that the local community organs possess, would get lost. 55
Not only national public administration leads to a lack of control and invites exploitation of the poor relief system, but also if there are many different, uncoordinated sources of help. Schmoller referred to the experience of the Netherlands and showed how the system of many different charities kept people into poverty. 56 Instead of trying to earn a living by working, the poor exploit the different sources of support.
There are complaints from the Netherlands that in every town there are four to six different organizations, foundations, associations, etc. that provide help entirely independent from each other. The larger the means of private persons, associations, foundations are, the worse will be the effects of such splintering. 57
Schmoller concluded that only excellent personnel with clear instructions and
54 The original German quote reads as follows: "Nur ihre Armenpflege (die bürgerliche Gemeinde) verteilt die Last gleichmäßig und gerecht auf alle Bürger, hauptsächlich auf die mit größerem Einkommen; nur sie erreicht alle Armen." Schmoller, Blueprint , II, 1923, op. cit ., p. 382. For Schmoller's notion of social justice in relation to the income tax, see Hansen, 1997, op. cit. 55 The original German quote reads as follows: "Und es hat nicht an theoretischen und praktischen Stimmen gefehlt, die dem Staate als solchem die ganze Armenpflege und Armenlast übertragen möchten... Eine Staatsarmenpflege wäre noch viel mehr als die Gemeindearmenpflege eine kommunistische Maßregel, wobei jeder Arme aus dem gemeinsamen Topf möglichst viel ohne Gegengabe haben wollte, wobei das Verantwortungsgefühl, das jetzt die Gemeindeorgane haben, fehlte." Schmoller, Blueprint , II, 1923, op. cit ., p. 385. 56 Some reminiscent are still present as documented by J.G.A. van Mierlo. Editor. 1991. Particulier Initiatief in de Gezondheidszorg . (The Third Sector in Dutch Health Care). Assen/Maastricht: van Gorkum. 57 The original German quote reads as follows: "Aus den Niederlanden wird geklagt, daß in jeder Stadt 4 - 6 verschiedene Organe, Stiftungen, Vereine usw. bestehen, die ganz unabhängig voneinander vorgehen. Je größer die Mittel der Privaten, Vereine, Stiftungen sind, desto schlimmer wirkt solche Zersplitterung." Schmoller, Blueprint , II, 1923, op. cit ., p. 388. 197
hierarchical control will be able to find the appropriate amount of poor relief. On the one hand, not too much help should be provided, because this would be an incentive for begging and it could lead to the formation of a proletarian class. On the other hand, not an insufficient amount should be given, so that people will be able to overcome their problem of poverty.
Ultimately, the poverty administration of the communities should be abolished as it is only a transitory solution. Schmoller favored and expected that (in line with his active political involvement) a market solution would evolve.
The last goal must be to advance the less fortunate classes of society through savings banks, cooperatives, associations for mutual support, and an insurance system that they no longer will need help from the poor relief administration. 58
A system of insurance and savings accounts can relieve poverty, and in particular sudden poverty due to illness. "Similar to the poor relief administration we deal with social institutions, but they are better tied to individual and social interests..." than the former. 59 Between 1840 and 1900 "the existing mutual support systems of the lower and middle classes providing support in case of illness and death ... developed into a great worker insurance." 60 In contrast, if the insurance was in the hands of large business companies, Schmoller noted that
... only to a modest degree the companies succeeded with the insurance of life annuities; they have been unsuccessful with orphans-, widows- and the sick insurance, although they made many efforts. To find mathematically secure bases and to organize a business which is commercially safe seems to be too difficult in these cases. 61
58 The original German quote reads as follows: "Das letzte Ziel muß sein, durch Sparkassen-, Genossenschafts-, Hilfskassen-, Versicherungswesen die gesamten weniger bemittelten Schichten der Gesellschaft so weit zu bringen, daß sie der Armenunterstützung nicht mehr bedürfen." Schmoller, Blueprint , II, 1923, op. cit ., p. 389. 59 The original German quote reads as follows: "Es handelt sich wie beim Armenwesen um soziale Gemeinschaftseinrichtungen, aber mit besserer Verknüpfung der Individual- und Gesamtinteressen,..." Schmoller, Blueprint , II, 1923, op. cit ., p. 390. 60 The original German quote reads as follows: "...die bestehenden Kranken- und Sterbegeldkassen der unteren und mittleren Klassen (wuchsen) sich ... zu einer großartigen Arbeiterversicherung aus..." Schmoller, Blueprint , II, 1923, op. cit ., p. 392. 61 The original German quote reads as follows: "Die Versicherung von Renten ist den Gesellschaften nur in beschränktem Umfang gelungen, fast gar nicht die Waisen-, Witwen- und Krankenversicherung, obwohl sie viele Versuche machten. Hierfür mathematisch sichere Grundlagen zu gewinnen und ein kaufmännisch sicheres Geschäft zu organisieren, scheint allzu schwierig zu sein." Schmoller, Blueprint , II, 1923, op. cit ., p. 397. 198
Schmoller explained why small local cooperatives providing mutual support perform much better than joint stock companies.
Smaller, more local insurance associations have the advantage that they can work with the most simple and inexpensive organization; they can rely on physicians' knowledge of persons and cases; they are based on the sympathetic feelings of neighbors, friends, professional peers, just like the old guilds. Up to now, the health insurance system has not prospered in any other way; it was always a failure in the hands of joint stock companies organized according to business principles. 62
Schmoller observed that traditionally employers also had to play their role in providing social security to their workers. Employers had to share in the health care costs of employees. This developed from a company-based worker insurance, where health insurance costs were part of the production costs. In this respect Schmoller saw Bismarck's legislation more an evolution than a revolution.
... according to an old social principle the employer, landowner, ship-owner, or mine-owner had to share in supporting their people when they were old and sick or in need. Today, in a time of large industries and under current insurance laws, this obligation has turned into contributions of employers to employee insurance funds required by public law, or even in the obligation of employers to carry the costs of particular damages (accidents), which are part of the production costs. 63
Companies' payments for health insurance mean investment in human capital. Schmoller observed: "...soon grew the insight [on the side of the employers, my add.] that foundation and support of these funds is a means of power, even a good capital
62 The original German quote reads as follows: "Kleinere, mehr lokale Versicherungsvereine haben den Vorzug, mit einfachster billigster Organisation, gestützt auf ärztliche Personen- und Sachkenntnis, zu arbeiten; sie ruhen auf den sympathischen Gefühlen der Nachbarn, Freunde, Berufgenossen, wie die alten Gilden. Das Krankenversicherungswesen hat bis jetzt nicht anders gedeihen wollen, ist den kaufmännisch organisierten Aktiengesellschaften bis jetzt stets mißlungen." Schmoller, Blueprint , II, 1923, op. cit ., p. 389. 63 The original German quote reads as follows: "...; es war ferner ein uraltes soziales Prinzip, daß der Dienstherr, der Grundherr, der Schiffsführer, der Bergwerkseigentümer für seine kranken, alten, in Not befindlichen Leute mit einzutreten hatte. Diese Verpflichtung verwandelte sich jetzt auf dem Boden der Großindustrie und des heutigen Versicherungsrechtes in die öffentlich-rechtliche Zuschußpflicht der Arbeitgeber zu den Arbeiterversicherungskassen oder gar in die Pflicht, für gewisse Schäden (die Unfälle), welche sich als einen Teil der Produktionskosten darstellen, ganz aufzukommen." Schmoller, Blueprint , II, 1923, op. cit ., p. 401. 199
investment." 64 Not only are the employees more healthy, but employers, who make contributions to employees unemployment insurance, can expect more loyalty from their employees.
In paragraph 221 on how the German unemployment insurance originated, Schmoller stated that "millions are insured, who would not be covered without compulsion and if the compulsory funds would not exist." 65 Insurance laws and state control prevent wide-scale fraud and abuse. A widespread form of a different type of abuse is according to Schmoller "... the tendency to get as much out of the funds as possible." 66
Larger funds can work more efficiently: they are technically better administrated, can afford to pay better qualified board members, are better experts in control of the ill, and their overhead costs are relatively lower: "The smaller the funds, the larger the expenses." 67 While Schmoller observed a trend towards larger health insurance funds, he noted their specific disadvantages, "... the other side is here the more pronounced, that is the difficulty to let the members have not only an interest in the benefits of the insurance fund, but also in the fund itself, its administration and prosperity." 68
8.3 The Translation of Schmoller's Approach into a Research Program
Schmoller, who has so far been discussed as a social scientist, was also an organizer of research in his activity as founder and publisher of what came to be known as his journal ( Schmoller's Jahrbuch ), various book series, and, most importantly, by organizing the Verein für Socialpolitik .69 This was a most unusual experiment in itself,
64 The original German quote reads as follows: "...bald wuchs auch die Einsicht (bei den Arbeitgebern, my add.), daß die Errichtung und Unterstützung dieser Kassen ein Machtmittel, ja eine gute Kapitalanlage sei." Schmoller, Blueprint , II, 1923, op. cit ., p. 407. 65 The original German quote reads as follows: "Millionen sind versichert, die es ohne den Zwang und die Zwangskassen nicht wären." Schmoller, Blueprint , II, 1923, op. cit ., p. 419. 66 In German, Schmoller referred to this type of abuse as "kleinen Mißbrauch ... die Neigung, möglichst viel aus den Kassen zu ziehen." Schmoller, Blueprint , II, 1923, op. cit ., p. 419. 67 In the original German, this reads: "Je kleiner die Kassen, desto größer die Ausgaben." Schmoller, Blueprint , II, 1923, op. cit ., p. 419. 68 In the original German quote this reads: "...die Kehrseite des ganzen Systems tritt bei ihnen noch stärker hervor, nämlich die Schwierigkeit, den Mitgliedern außer dem Interesse an den Benifizien ein Interesse an der Kasse, ihrer Verwaltung, ihrem Gedeihen beizubringen." Schmoller, Blueprint , II, 1923, op. cit ., p. 419. 69 "On July 13, 1872, a number of leading German academic economists of the day - Adolph Wagner, Wilhelm Roscher, Johannes Conrad, Ernst Engel, Georg Fr. Knapp, Lujo Brentano, and Julius von Eckhardt - met in Schmoller's house in 200
starting in his own house. Organizing the diverse, stubborn, and often lonely professors of economics into coherent research efforts, in each case devoted to applied questions and moreover in each case to politically acute and practically relevant applied questions was a feat we cannot document in any other Western country at the time. More astonishingly, Schmoller pulled this off for almost fifty years and his successor, Heinrich Herkner, for another decade.
One of the focuses of this research effort into social policy was health economics. Of the 285 volumes published by the Verein für Socialpolitik ,70 the following are devoted to health economics. The list is a selection of the research program of the Verein für Socialpolitik on the basis of the Hohmann catalog. Please note how broad the conception of the subdiscipline is.
0 Engel, Housing Shortage
5 Old Age and Workers' Compensation Funds
9 idem (Kalle, Duncker)
30 - 31 Housing Shortage
33 Housing of the poor in inner cities; internal colonization and agricultural smallholdings
36 The influence of the structure of wholesale trading on retail prices (mostly with respect to basic nutrition).
37 Retail trade structure and prices of basic necessities (bread, meat)
56 Internal colonization and consumer cooperatives
89 Railroad tariffs and prices for bread and wheat (Keestermann)
94,95, Urban Housing 96,97,98
Halle to set up the Kongress für soziale Reform . [fn.] Professor Bruno Hildebrand was elected chairman, but discussions were conducted by Gustav Schmoller. [fn.] The new group decided to meet regularly to discuss the pressing social and economic problems of the day and to propose draft legislation for their amelioration. [fn.] Balabkins, 1988, op. cit. , p. 30. 70 In fact, the number is not correct. The first volume is the number zero, some volumes never appeared, and other volumes appeared in more than half a dozen parts. A reliable compilation has been presented by Wilhelm Hohmann to the 15th Heilbronn Symposion on the Social Sciences , The Social Question. June 20 - 23, 2001. Wilhelm Hohmann, Nr. 58, 10/11 2001. 201
104.2 Shipping (hygiene and nursing of seafaring men) (Markl)
109 Labor market crisis (and its impact on sickness funds)
128 Municipal plants (meat, dairy products, homes for the single, voluntary and (municipal) state institutions of welfare provision
129,6 Gas, water, electricity, tram service and housing (Bucerius)
129,8 idem
129,9 Königsberg: "Betriebe zur Pflege der öffentlichen Gesundheit." (Municipal works to provide for public health).
130.2 Works to combat contagious diseases (Michels - Lindner)
133 Worker careers in high industry - the psycho-physics of textile work (Marie Bernays).
135.0 Young working girls in Munich - 3, 4 extensions to leather, stone and wool production.
139.1 Price formation for cattle and meat on the market in Berlin.
139.2 Increase in the price of necessities (discussing extensive vs. intensive methods of agricultural production).
139.3 Wheat price fluctuations and their causes (Louis Perlman).
139.5 Meat supply of Munich
140.1 Dairy supply of Karlsruhe
140.2 Price formation in dairy products
140.3 Theory: production, retail and price formation in dairy products (Jahn, Hubner, Geiger, Teichvit).
140.4 idem
141.1 Argentina (meat production)
Here follows an in-depth analysis of price formation of agrarian products in different industries, countries and continents. There are quite a few theoretical contributions.
202
145.1 Urban price levels for German Cities.
146.1 Household budget analysis for workers' and middle class households. (Nutrition in terms of calories and nutritional indication).
147 deals with the notion of settling Germans in the tropics (the colonies) with a heavy emphasis on health and health related issues (5 volumes).
147.5 Health conditions of German colonists in Brazil (Wagemann)
169 Inflation and stabilization: impact on social development
(from customs to the arts, health effects conspicuously missing!)
177.1 Housing issues
It is revealing how the integrated approach to social policy affords health issues a central place which gets lost once the differentiation into economics, business economics, public administration, and the other social sciences gets underway. The table given above lists these health related publications of the German Economic Association ( Verein für Socialpolitik ) over the period from 1872 until 1935. Health related topics cease to be discussed approximately with Schmoller's death (1917). It would take more than fifty years before the topic would reemerge in economic publications as a major issue.
8.4 Summary and Conclusions
In this chapter, we focused on Schmoller's thought relevant to health economics. Schmoller saw illness as the main factor leading to poverty. Coming irregularly and unpredictably, illness would disrupt the family household just like a war would disrupt the household of the state. (Schmoller, Blueprint , II, 1923, op. cit ., p. 402). Schmoller saw health issues in the context of the Social Question , which he wanted to relieve. In this chapter, a more narrow view was taken by looking at his economic analysis of issues affecting directly and indirectly the health states of people. From this perspective, Schmoller's discussion of the evolution of institutions mitigating economic insecurity and poor relief are among the relevant themes. This is the background for his own theoretical position. Schmoller wanted to insure the major risks in workers lives. By establishing state institutions of compulsory social insurance he wanted to create the basis on which further markets for insurance could develop. The purpose of this and other insurance schemes proposed is to prevent unforeseen interruptions of the household economy in order to enhance rational economic calculation.
Schmoller was the editor of the leading economics journal in Germany at the time. As 203
the name of the Journal indicates, Annals of Legislation, Administration and Political Economy in Germany ( Jahrbücher für Gesetzgebung, Verwaltung und Volkswirtschaft im deutschen Reich ), it was about social policy reforms in their broader sense. Health issues have also been discussed in the research work of the German Economic Association ( Schriften des Vereins für Socialpolitik ), which has been set up and coordinated by Schmoller, and finally in the Acta Borussica . Schmoller's manifold activities and projects are sometimes referred to as Schmoller's program. By specifically training students for publication of their work and by suggesting topics for research, he inspired others to perform research along the same line. The notion of social justice is what Schmoller shared with the people participating in his program. "At the core of Schmoller's program stood his sense of social justice. This was the motivation to contribute scientifically, with the help of the "historic-ethical" method, to the solution of the Social Question ." 71 Hansen has shown the influence of this notion of social justice on the reform of the income tax legislation as suggested by Schmoller. In understanding the interdependency of Schmoller's approach, Hansen interpreted the reform of the income tax legislation as an integral part of social welfare legislation. Both types of legislation are directed towards reaching a higher cultural formation and civic virtues.
Risk limitation of the household is central to Schmoller, who focused on the household as the basic unit in the economy. 72 He observed that the household was threatened in its functioning by major risks. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop so that individual households could further decide on risk limitation, for instance by buying additional insurance coverage or by taking out credit. Schmoller only wanted to provide the most basic social welfare institutions, as he was in favor of market based solutions. His goal was that risk limitation would occur through various forms of insurance and credit possibilities to be offered by the market.
In the context of poor relief, he repeatedly discussed health aspects. In finding the right measures for poor relief, he found it necessary to distinguish between different groups of the poor. Schmoller has observed that any kind of subsistence economy makes it very unlikely that people would fall into poverty through an unforeseen event such as illness. (Schmoller, Blueprint , II, 1923, op. cit ., p. 378). Hence, as a measure of relief he proposed a combination of an open and a closed system of state poverty care. Care at home leaves the individual relationships to family and employers, churches, associations, and guilds intact, as well as the obligation to take care of their members. Only the most basic public poor relief was to be provided. If care at a hospital was inevitable, for instance because better medical treatment was required, then one
71 In the German quote this reads: "Kernpunkt von Schmoller's Programm war sein Gerechtigkeitssinn, der ihn anspornte, wissenschaftlich, mit Hilfe seiner "historisch-ethischen" Methode zur Lösung der sozialen Frage beizutragen." Horst Betz, 2001, op. cit. , p. 39. 72 See Schmoller, Blueprint , II, 1923, op. cit ., in particular chapter 7 on work contract and work environment (pp. 294 - 367), and chapter 8 on new social institutions and welfare legislation (pp. 367-481). 204
should be aware of a patient's individual freedom.
In an historical overview, Schmoller showed that private initiatives of the church, religious orders, and wealthy citizens, individually or participatory in charities, have been one of the ways through which poor relief has been provided. He showed that poor relief can only be provided efficiently if there is a proof of need and if it is given on a case-by-case basis. If there are too many sources of help and private initiative remains uncoordinated, then this gives rise to abuse, even leading to an increase in the number of the poor. Therefore, there must be incentives to leave the poor relief system again. In Schmoller's time, the help provided by private charities, churches, and other initiatives was not sufficient. Therefore, he was in favor of basic social welfare legislation provided by the state. He followed the tradition of Wolff when he advised "... for Germany ... the initiative to social reform should better lie in the hands of a far- sighted monarchy with a healthy, first rate civil service ..." 73 Only first rate bureaucrats could perform a case-by-case proof and set incentives for recipients to leave the social welfare system, if help was no longer needed.
Schmoller has noted that the possibility to receive credit is important in an unforeseen emergency or illness, especially when there is no other safety net. Some modern proposals for a market-oriented health care reform center on the possibility to receive inexpensive credits. 74
He discussed how such social and economic mechanisms for risk limitation had evolved in the past. Among the evolving institutions were associations for mutual support which offered their members support in exchange for their contributions, but in a time of increasing industrialization, these associations were no longer sufficient. Schmoller was in favor of national compulsory social insurance, but he advised against large joint-stock corporations as providers of health insurance. He rather wanted smaller entities, for instance at the work level, to provide basic health insurance. 75
73 In the original German quote this reads: "Daher wird man jedenfalls für Deutschland behaupten können: die Initiative zur sozialen Reform liege besser in den Händen einer weitblickenden Monarchie mit einem gesunden, hochstehenden Beamtentum." Schmoller, Blueprint , II, 1923, op. cit ., p. 367. 74 Compare, e. g . the concepts developed by John C. Goodman and Gerald L. Musgrave, 1992, in Patient Power. Solving America's Health Care Crisis. Washington, DC: Cato Institute. 75 Individuals are willing to take higher risks, if they are insured for the consequences. This phenomenon, which today is referred to as moral hazard , can be restricted by control of the insured individuals. One way of control is to choose a small-scale insurance in an organization, where the person is known. Schmoller obviously had this in mind when he recommended small-scale insurance organizations. Another way to restrict moral hazard is by setting the appropriate incentives. Insurances experiment with insurance schemes containing own contributions and rewards for leading a healthy life as incentives to contain moral hazard. Willard G. Manning et. al. 1987. "Health Insurance and the Demand for Medical Care: Evidence From a Randomized Experiment." 205
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210
Chapter 9
Karl Bücher (1847-1930):
The Role of Nonmarket Exchange in Health and Health Care
Contents
9.1 Introduction: The Life and Work of Karl Bücher (1847 - 1930).
9.2 Bücher on the Gift Relationship, Borrowing and Lending, and the Voluntary Exchange of Labor.
9.3 Nonmarket Exchange in Health Care.
9.4 Summary and Conclusions.
This chapter has been written on the basis of my publication "Non Market Exchange in Healthcare: Lessons from Karl Bücher" in the volume on Karl Bücher: Theory - History - Anthropology - Non Market Economics . Editor: Jürgen Backhaus, 2000, Marburg: Metropolis, pp. 337-362.
211
9.1 Introduction: The Life and Work of Karl Bücher (1847 - 1930)
Karl Bücher, a historically working economic theoretician, has emphasized economic exchange before the advent of markets. In contrast to the classical economists, of whom he was critical for focusing on market exchange processes, Bücher has considered mainly that part of economic behavior which constitutes exchange without a market. As he has noted, nonmarket economic behavior accounted for a large part of the economy in its earlier stage of development. His illustration of nonmarket behavior includes such phenomena as the gift relationship, borrowing and lending of goods and services, and labor provided in exchange for future help. These kinds of nonmarket exchange are characterized by a give-and-take relationship and should therefore be distinguished from actions born out of altruism. In line with von Thünen's and Gossen's work, Bücher held that nonmarket economic behavior is grounded in the principle of marginal utility. His observations and interpretation of nonmarket exchange are included in this book because of the relevance of nonmarket arrangements in health care. The issue of nonmarket exchange in health care has become all the more important with the gradual collectivization of this sector. 1
Bücher's name is neither an entry in The Encyclopedia Britannica of 1997, nor in The Brockhaus Enzyklopädie of 1966, but he is included in the Brockhaus Konversations- Lexikon of 1892, which was published during his lifetime, as well as in the New Palgrave and in the International Encyclopedia of the Social Sciences . Bücher studied history, political science, and classical philology in Bonn and Göttingen, worked several years for the Frankfurter Zeitung and held chairs in Dorpat, Basel and Leipzig. 2 He was familiar with the English, French and German literature in economics of his time. 3 Besides his major works Development of the Economy , Contributions to Economic History and Work and Rhythm he published various monographs on labor conditions, the position of women, tax regulations, bookbinders, organizations of the handicrafts such as guilds and other forms in German towns of the Middle and High Middle Ages. 4 During his lifetime, he gave lectures at meetings of local organizations of industry and
1 A particular outgrowth of this literature is the work of the Tidmus School at York University. 2 Karl Polanyi. 1968. "Bücher, Karl." International Encyclopedia of the Social Sciences , pp. 163-165. 3 See for instance the catalogue of his library at the University of Kyoto: Katalog der Karl Bücher Bibliothek in der Wirtschaftswissenschaftlichen Fakultät der Universität Kyoto . Kyoto. 1970. 4 Karl Bücher. 1922. Die Entstehung der Volkswirtschaft. Volumes I and II. Tübingen: Laupp'sche Buchhandlung; 1922. Beiträge zur Wirtschaftsgeschichte. II. Tübingen: Laupp'sche Buchhandlung. 1919 5. Arbeit und Rhythmus. Leipzig: Verlag von Emmanuel Reinicke. The book received six editions and a Russian translation. The first edition was published in 1896 in Abhandlungen der Königlich Sächsischen Akademie der Wissenschaften , vol. 17, no. 5. Leipzig: S. Hirzel. The work was continually revised, the sixth edition was published in 1924, Leipzig: Reinicke. 212
handicraft upon invitation, and was frequently asked to write expert opinions. On the basis of his work, many doctoral theses have been written. 5
In Development of the Economy ( op. cit. ) and Contributions to Economic History ( op. cit. ) he showed the transition from a primitive society with no market exchange to a higher developed society in an exchange economy. In antiquity with production mainly taking place in the household ("oikos") there was almost no market exchange. To some extent, market exchange took place in the town economy of the Middle ages, but production had still very much the purpose to create an object of value for own use. Out of the earlier stages, the market economy ("Verkehrswirtschaft") developed which in comparison to earlier forms has the highest degree of market exchange. While Bücher has focused on nonmarket forms of exchange before the advent of markets, he has also shown that in the market economy next to the market other forms of exchange exist which are based on nonmarket transactions.
Work and Rhythm ( op. cit. ) was very popular at the time Bücher wrote. As he has noted in the preface to the fourth edition, he hit upon the subject of music, songs and poetry of laborers when working on older forms of labor cooperation. (1909. Leipzig and Berlin: Teubner). He has observed that music would enhance the productivity of people, and even makes animals work harder. In the book, he questioned why there is a division between play, sports, and movement for health-related reasons on the one hand and work, typically seen as a burden, on the other. A person from a primitive culture does not make the difference between play and work, but performs work according to need ("Bedarfsarbeit"). (Bücher, op. cit. , p. 5). The work effort results not only in owning a certain good, but work itself brings along pleasure and satisfaction. Technical means are imperfect and the work processes are long. Despite these circumstances, the products, usually intended for long-term use, often consist in works of art. Bücher found that creating art is a means to overcome the burden of work, but even more important is dance. (Bücher, op. cit. , p. 16). In studying music of laborers, Bücher has observed that the work rhythm determines the rhythm of the songs at work and that sometimes two, three, or even more, laborers work together to make a rhythm possible, even if each one of them pursues his own goal. Singing has an even stronger productivity-enhancing effect than dancing, in particular if a social duty requires people to work together on the same goal. 6 In particular in small villages it often was a social duty of neighbors to help each other with work on the fields, building homes, work in the home, in case of illness, or at harvest time, when the work could not be delayed.
5 Lectures and industry studies leading to expert opinions, as well as the work of his doctoral candidates are available at the Karl Bücher estate of Kyoto University. 6 According to Alchian and Demsetz, team production requires costs of monitoring and control. Although Bücher has not made this explicit, he discovered a method of control in team production, as working together according to a rhythm is a method of minimizing costs of monitoring and control. See Armen A. Alchian and H. Demsetz. 1972. "Production, Information Costs, and Economic Organization." American Economic Review . 62, pp. 777-795. 213
Bücher has observed that nonmarket exchange relationships in the sense of what might appear as unilateral voluntary behavior and therefore outside the realm of economic analysis is, in fact, bilateral exchange. This exchange is based on mutual advantage made possible by social norms, where the legal order could not bring about feasible results. These institutions such as voluntary labor exchange ("Bittarbeit") are therefore within the scope of economics. In various sections of his work, Bücher has analyzed the exchange of goods, services, productive capital and labor, which takes place outside the market. 7 This will be the subject of the next section (9.2), followed by a discussion of the relevance of his contributions for health economics today (section 9.3), and a summary and conclusions (section 9.4).
9.2 Gift Giving, Borrowing and Lending, and Labor Exchange.
Bücher placed particular emphasis on the study of gift giving, borrowing and lending, and labor exchange. He built on a well-established tradition in German economic theory. Already von Thünen pioneered the idea of gift-giving through his will. In his will, von Thünen gave almost his entire estate to his farmhands as a gift. It provided them with a basis for living and the possibility to build up future capital. In return, he expected the children of the beneficiaries to be better educated, to the benefit of their proficiency in agriculture or other pursuits and as mature citizens.
Bücher was aware of the formulation of the principle of marginal utility by Gossen and von Thünen and applied it in order to explain the phenomena of nonmarket exchange. (1919, op. cit. , p. 23, note 1). By marking the following quotes, Bücher has emphasized the principle of marginal utility in his personal copy of von Thünen's Isolated State .
At the border of the cultivated land of the Isolated State, where the ground does not yield rent, and the revenue of the estate is limited to the interest borne by buildings and standing capital, the effect of an increase of the labor wage will be that the land rent will become negative, i.e. fall below zero (p. 68). Herein is the reason revealed for such an important phenomenon of our future investigation: that each unit of newly invested, additional capital will bear smaller rents than the one invested earlier (p. 99). 8
7 Chapter 1, "Schenkung, Leihe und Bittarbeit." Karl Bücher. 1922. Die Entstehung der Volkswirtschaft . II. Tübingen: Laupp'sche Buchhandlung, pp. 1- 26. p. 288 on "Bittarbeit." In: Karl Bücher. 1922. Die Entstehung der Volkswirtschaft . I. Tübingen: Laupp'sche Buchhandlung. Ch. V., "Der Arbeitsgesang zum Zusammenhalten größerer Menschenmassen, insbesondere bei der Bittarbeit." Karl Bücher. 19195. Arbeit und Rhythmus . Leipzig: Verlag von Emmanuel Reinicke, pp. 266-331. 8 In the original German quote this reads as follows: "An der Grenze der kultivierten Ebene des isolirten Staats, wo der Boden keine Rente gibt, und der Gutsertrag auf die Zinsen des in den Gebäuden u. stehenden Kapitals beschränkt ist, muß durch eine Erhöhung des Arbeitslohns die Landrente 214
Being the successor of Roscher in Leipzig, Bücher continued in the same tradition. 9 Roscher had pointed towards the production and exchange of goods and services without the use of money. In what was meant as a remark on the side, he described networking in the lower classes as an economic phenomenon.
The network of help of family members and in particular the help of friends and neighbors is admirably strong in the lower classes. It is more than likely that the kind of help provided by these circles is by far higher in value than the charitable care provided by the higher classes. This is not only true with respect to the ability to help, but also in absolute terms. It is most likely that the value of this mutual support is by far higher than that of the so much appraised charities and gifts of the wealthy. 10
In going beyond Roscher's work, Bücher developed a theory of reciprocal exchange taking place even in the absence of a market. He considered cases of mutual support as examples of such exchange relations. 11
The nonmarket forms of exchange described in the first chapter of Bücher's Development of the Economy ( Die Entstehung der Volkswirtschaft. II. ) are "Gifts, Borrowing and Lending of Goods or Capital and Labor Provided in Exchange for Other Labor." 12 He has shown how gaps in the own provision lead to nonmarket exchange in
negativ werden, d.i. unter Null herabsinken." (p. 68). "Hier offenbart sich der Grund der für unsere fernere Untersuchung so wichtigen Erscheinung: daß jedes in einer Unternehmung oder einem Gewerbe neu angelegte, hinzukommende Kapital geringere Renten trägt, als das früher angelegte." (p. 99). Copy of: J. H. von Thünen. 1875. "Der isolirte Staat" in Beziehung auf Landwirtschaft und Nationalökonomie . 3. Auflage, 1. Theil, Berlin: von Wiegandt, at the library of the University of Kyoto, Estate by Karl Bücher. 9 Karl Bücher. 1922. Die Entstehung der Volkswirtschaft . II. Tübingen: Laupp'sche Buchhandlung, p. 3. 10 "[Die Hilfe von Verwandten, besonders auch von Freunden und Nachbarn ist in den unteren Ständen in bewundernswürdiger Weise ausgebildet. Es ist sehr wahrscheinlich, daß an derartiger Hilfe von diesen Kreisen weit mehr geleistet wird, als alle über ihnen stehenden Klassen and fürsorglichem Tun aufzuweisen haben. Das gilt im Hinblick auf die Leistungsfähigkeit hüben und drüben, aber auch absolut dürfte der Wert dieser gegenseitigen Unterstützung die so oft gepriesenen Stiftungen und Gaben der Bemittelten weit übersteigen.]" Wilhelm Roscher. 1906 3. System der Armenpflege und Armenpolitik. (System of Poverty Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger, p. 76. 11 The subject of exchange in a nonmarket environment is still a neglected topic one typically does not find mentioned in a modern textbook on microeconomics. See, for instance, Jochen Schumann. 1992 (6). Grundzüge der mikroökonomischen Theorie . Berlin/Heidelberg. Springer. 12 "Schenkung, Leihe und Bittarbeit", In: Karl Bücher. 1922. Die Entstehung der 215
an economy, where markets for monetary exchange are lacking.
These phenomena always belong to the early time of the closed house economy. If gaps in the own provision occur, one endeavors to get from other economies, what one does not own, but what one desires for the one or other reason. In the case of goods, depending on the nature of the goods, this leads either to the gift relationship or to borrowing and lending. In the case of labor input it leads to the provision of voluntary labor (in response to a request). In all of these cases it is not about receiving something without giving anything in return. Instead, this is giving with the purpose to receive something else in return, the amount of which one can determine up to a certain extent.13
The decision for exchange is made by groups of people striving for a common goal, but they are often represented by one person initiating the exchange. Bücher has distinguished among the core family, the extended family, sometimes called "the house," and the tribe. He has illustrated how gift-giving among natural tribes leads to exchange.
The gift relationship is very important among natural tribes ... Not only food is shared voluntarily very often and never denied to the hungry anyway, but frequently, all kinds of implements and utensils are turned over to others. These gifts, however, are not handed over while abandoning any claim of response, but under the expectation of a gift in return, with the person bestowing the gift in the first place having a say in the characteristics of what specifically he will receive back in return. 14
While altruistic motives are not the primary motives, they might play a certain role.
Volkswirtschaft. II . Tübingen: Laupp'sche Buchhandlung, pp. 1-26. 13 The original German quote reads as follows: "Immer aber gehören diese Erscheinungen der Frühzeit der geschlossenen Hauswirtschaft an. Wo man Lücken in der Selbstversorgung verspürt, wird das Streben lebendig, von anderen Wirtschaften zu erlangen, was man selbst nicht besitzt, aber aus irgendeinem Grunde begehrt. Bei Sachgütern greift man je nach der Natur der gewünschten Güter zur Schenkung oder Leihe, bei Arbeitsleistungen zur freiwilligen Hilfeleistung (Bittarbeit). In allen diesen Fällen handelt es sich nicht um ein Erlangen ohne Gegenleistung, sondern um Hingabe mit dem Zwecke, dafür anderes zu gewinnen, dessen Betrag man bis zu gewissem Grade selbst zu bestimmen vermag." 1922, II, op. cit. , p. 4. 14 "Die Schenkung spielt unter den Naturvölkern überall eine große Rolle. 1) Nicht nur das freiwillige Mitteilen von Nahrungsmitteln, das nirgends dem Hungrigen versagt wird, sondern auch die Hingabe von allen Arten von Gebrauchsgegenständen kommt überaus häufig vor. Aber diese Schenkungen sind niemals unter Verzicht auf jede Erwiderung gemacht, sondern in der Erwartung einer Gegengabe, über deren Beschaffenheit der Schenkgeber mitbestimmen kann." 1922, II, op. cit. , p. 4. 216
This kind of gift relationship does not result from pity and mercy on the one hand, or need and poverty on the other; no religious or moral duty has to be fulfilled; it originates solely from the attempt to gain the favor of the receiver and to obtain benefits from it. At this stage of development, the gift originates from egoistic motives; it is nothing else but a means to reach, what one wants and strives for, although altruistic motives might play a larger or smaller supporting role. 15
Bücher has pointed out that the gift is intended to set off an exchange which would help to relieve a gap in provision faced by the giver.
It is in particularly significant that the gift at this stage of development is not initiated by the one who has an excess of means of which he wants to make others aware of, but by the one who is facing a gap and who is looking for a remedy to overcome that shortage. Despite this intention, the gift leads to a feeling of satisfaction on the side of the receiver, because it comes unexpectedly and because never there exists a legal claim to a gift. 16
When a gift is expected and not received, then a feeling of dissatisfaction will result. Bücher has noted that a gift will usually come unexpected and without being asked for in order to create an introduction for future businesses act that had otherwise not taken place. A gift is transferred in order to initiate a business contact, but a gift unwanted or of low quality can be returned for a more suitable gift in order to start an exchange. Bücher has described the control mechanism in the gift relationship as follows:
Rejection of the gift would be a serious insult to the giver; acceptance of the gift will always oblige the receiver to confer a gift in return, and the gift relationship is only definitive when the first giver has expressed satisfaction with what has been passed over to him in exchange for his original gift. Up to that point, the
15 The original German quote reads as follows: "Wir haben es also bei dieser Art der Schenkung nicht mit Mitleid und Barmherzigkeit auf der einen, Mangel und Dürftigkeit auf der andern Seite zu tun; es wird keine religiöse oder sittliche Pflicht mit ihr erfüllt; sie entspringt vielmehr allein dem Streben, die Gunst des Empfängers zu erwerben und von ihr für sich Nutzen zu ziehen. Es entsteht also das Geschenk auf dieser Stufe der Entwicklung aus eigensüchtigen Beweggründen; es ist nichts weiter als ein Mittel, das zu erlangen, was man wünscht und erstrebt, wobei die Mitwirkung altruistischer Motive immerhin in größerem oder geringerem Maße vorkommen mag." 1922, II, op. cit. , p. 6. 16 The original German quote reads as follows: "Da ist es nun besonders bedeutungsvoll, daß die Schenkung dieser Entwicklungsstufe nicht von demjenigen ausgeht, der Überfluß hat und ihn einem andern bekundet, sondern von demjenigen, der Mangel hat und auf diese Weise zur Beseitigung desselben gelangen möchte. Trotzdem erweckt sie seiten des Beschenkten das Gefühl der Befriedigung, weil sie unerwartet kommt und niemals ein Rechtsanspruch auf das Geschenk besteht." 1922, II, op. cit. , p. 6. 217
initial gift can also be called back. 17
Hospitality is a special case of the gift relationship. In return for the gift, the guest is allowed to travel freely through the territory, and receives protection by the host. (1922, II, op. cit. , p. 8).
Bücher has noted that exchange is a characteristic of both, gift-giving as well as borrowing and lending of tools, machinery, and other productive capital. In some cases, slave labor was also subject to borrowing and lending.
In contrast to a gift which refers to the act of conferring a subject permanently into someone else's property, lending means the temporary transfer of use to another person under the provision that the good will be returned undamaged. This provision is likely to be fulfilled, if the lender, in need of something himself, asks the borrower of the good for whatever he is lacking. Among people who lead a simple lifestyle, borrowing and lending can be observed as a custom around the entire world. ... The reason that Roman jurists have so carefully created and treated the contract form of Commodatum is most likely that in the common life next to the overwhelming type of monetary exchange the borrowing-for-use relationship was also fairly important. 18
As Bücher has pointed out, borrowing and lending is based on custom and was important as an early type of credit. It is not an abstract credit based on money. Rather, as in today's Islam it is a credit based on a particular purpose, an activity, or a function, and it is embodied in an asset that reflects this purpose such as a ship. These embodied credit relationships require norms in order to be credible. Moral hazard needs to be avoided. These norms as they develop are tied to those specific customs,
17 The original German quote reads as follows: "Ihre Ablehnung [der Schenkung] wäre eine schwere Beleidigung des Schenkers; ihre Annahme verpflichtet den Empfänger unbedingt, und das Geschenk ist erst dann endgültig abgeschlossen, wenn sich der Schenkgeber mit der Gegengabe zufrieden erklärt hat. Bis dahin ist auch das Anfangsgeschenk widerruflich." 1922, II, op. cit. , p. 7. 18 The original German quote reads as follows: "Bezeichnet das Geschenk die dauernde Hingabe einer Sache zu fremdem Eigentum, so ist die Leihe eine zeitweise Überlassung zum Gebrauche unter der Voraussetzung unversehrter Rückgabe; sie mag vielleicht darin gefunden werden, daß der Darleiher im Bedarsfalle seinerseits den Empfänger des Leihguts wieder um eine ihm fehlende Sache in Anspruch nimmt. Sie findet sich als Sitte auf der ganzen Erde unter einfachen Verhältnissen. ... Daß die römischen Juristen die Vertragsform des Commodatum so sorgfältig ausgebildet und behandelt haben, hat wohl darin seine Ursache, daß im gewöhnlichen Leben neben dem alles beherrschenden entgeltlichen Verkehr auch die Gebrauchsleihe noch eine recht große Bedeutung gehabt hat." (1922, II, op. cit. , pp. 11, 12). In Rome, both, renting of slaves in exchange for monetary compensation and borrowing and lending of slaves were common. 1922, II, op. cit. , p. 12. 218
techniques, and purposes, and perfected thereupon. This process of perfection is an evolutionary process and can yield superior business practices. However, as Schmoller has pointed out in his discussion of these issues, the superiority comes at a price. "Over time, flexibility gets lost due to the rigidity of law and social customs." 19 Societies based on these embodied credit institutions experience difficulties with entrepreneurship and technical change.
A special form of borrowing and lending discussed by Bücher is labor provided in exchange for future help ("Bittarbeit"). "It is similar to the gift, and also to borrowing and lending where in return of a performance a counter performance is expected, and in all of these cases a precise counter deliberation is not possible..." 20 as the issues involved are not commensurable. Hence, the incentive for a high-quality performance lies in the reciprocity of the relationships.
Bücher has shown that in all cases of nonmarket forms of exchange the value cannot be determined easily. This does not cause a problem, because due to the reciprocal relationships all potential participants are motivated to deliver a high quality performance. If they do not follow the social consent as expressed by the social custom they will be faced with sanctions such as unfriendliness in their immediate environment and exclusion from future exchange.
In modern economic terms, the attention shifted from social customs to social norms which are at the basis of social customs and important determinants of our behavior. 21 Social norms are defined as rules, which are complied with, although they are neither promulgated by any legal source, nor legally enforced. What are the incentives for obeying social norms? As Bücher has pointed out, fear of ostracism is an incentive to follow social norms. Ostracism refers to the refusal of other group members to let an individual participate in any advantageous transactions. The incentive to the ostracizer is to avoid future costs from dealing with the norm breaker. In this sense his or her behavior might privately and socially be cost-justified. An additional incentive to obey social norms becomes important in Bücher's analysis. Social norms are self-enforcing, when norm compliance confers private benefits. An example includes complying with those sets of rules, which govern gift exchange, and borrowing and lending. The norms surrounding those exchanges are too subtle to be backed by law as a precise counter deliberation of the values is not possible. In this case self-selection is present, because the parties have accepted to participate in the exchange and along with it agreed to the
19 In the original, this reads as follows: "Die Anpassungsfähigkeit geht aber durch die Starrheit von Recht und Sitte stets mit der Zeit verloren." Gustav Schmoller. 1923 (2). Grundriß der Allgemeinen Volkswirtschaftslehre . First Part. ( Blueprint , I). Munich, Leipzig: Duncker & Humblot, p. 53. 20 The original German quote reads as follows: "Sie gleicht darin dem Geschenk und am Ende auch der Gebrauchsleihe, daß jedesmal bei ihnen der Leistung die Erwartung einer Gegenleistung gegenübersteht und daß in allen Fällen eine genaue Wertabwägung nicht möglich ist." 1922, II, op. cit. , p. 17. 21 Richard A. Posner. 1997. "Social Norms and the Law", American Economic Review . May 1997, 87 (2), pp. 365-369, see in particular pp. 365-366. 219
social norms governing this behavior. In this case, social norms are likely to be obeyed, because the private costs of complying are low and the benefits are substantial.
Bücher clearly distinguished "social custom" from law. In studying the transition of societies, he has pointed out that "help among neighbors as far as I can see has never been regulated by law. But help among neighbors is thoroughly rooted in the social custom." 22 If the common consent as expressed by the social custom is replaced by law then nonmarket forms of exchange may become different and even cease to exist. The historical institutions of gift exchange and voluntary exchange of goods, services, and labor in some cases have developed into forms of taxation customs duties and futile liens with the emergence of the tax state. 23
In the next section, we will look at the relevance of Bücher's analysis to health care. The question arises whether we can observe the element of exchange in nonmarket phenomena of health care.
9.3 Nonmarket Exchange in Health Care
As Bücher has pointed out, the exchange of performances can regulate behavior in a nonmarket environment. In modern economies, economic life is typically coordinated by markets and regulated by law, but there are still important sectors where other mechanisms are present. Health care is an outstanding example where charity plays a role.
In his contributions to Economic History ( op. cit. ), Bücher has given the example of the Beguines who joined a lay sisterhood and were devoted to a religious life, but did not belong to an approved religious order. The Beguines first appeared in the beginning of the thirteenth century in Belgium, and later spread to the Netherlands and Germany. Bücher has described them as a group of women who could not get married. They lived together and it was the city's duty to protect them. In return, the lay sisters performed good deeds and charity, preferably in health care. The Beguines came from the upper class, later middle class. They were rich and had a considerable influence in the city. 24 Help was performed as a reciprocal relationship, a condition under which
22 In the original German quote this reads as follows: "Nirgends ist die Bittarbeit, soweit ich sehen kann, durch Gesetze geregelt worden. Aber sie ist in der Sitte fest verankert." 1922, II, op. cit. , p. 17. 23 In the original German quote this reads as follows: "Under certain conditions, the gift relationship becomes a tax and customs duty, and voluntary labor exchange becomes servitude." The original quote reads as follows: "Der Schenkung entwachsen unter bestimmten Verhältnissen Steuer und Zoll, der Bittarbeit die Fronde." 1922. II, op. cit. , p. 18. According to Bücher, such conditions could involve an unequal distribution of the land, or if the common consent is turned into law. 24 Karl Bücher. 1922. Beiträge zur Wirtschaftsgeschichte. II. Tübingen: Laupp'sche 220
according to Bücher a high quality of goods and services will be provided.
The modern political discussion of health issues often centers between legal regulation and the market as governance principles of health care. The third alternative as proposed by Bücher, mutual support based on reciprocity, has often been overlooked. It is the purpose of this section to see whether a niche could be identified that allows for nonmarket exchange in health care.
The issue of quality is crucial to blood donations. Low-quality blood and blood borne diseases such as HIV/AIDS are a challenge to transfusion medicine in the United States. The nationwide, blood collection and distribution system of the United States consists partly of voluntary and partly of commercial donors. As a consequence of self selection, the pool of commercial donors has a higher degree of poor (contaminated) blood than the pre-selected voluntary donors provide. For instance, if there is a blood drive among a particularly healthy segment of the population, the sample is different from people who walk in from the street and give blood for a small monetary reward. While the solution to the problem of low quality blood donated has been looked for in the development of antibody testing and other medical advances, the organizational shortcoming has been overlooked. According to Bücher's theory, the crisis of low blood quality could be solved if one would introduce the condition of reciprocity into blood donating, for instance if a person in exchange for donating blood would receive regular health check ups for free. Under the current American system, the donor remains anonymous, because he or she cannot get a response from the receiver of the blood and will typically not be involved in a future exchange such as a regular health check up. Someone who has donated bad blood will not see the consequences of his action. If reciprocity could be employed in the process, for instance in a nonmarket exchange, then the quality of the blood donated would probably increase.
Fundraising is an important aspect of the health care industry. If a company wants to promote its brand in conjunction with a good cause, such as a charity, then the condition of reciprocity differs from the cases Bücher has discussed. In their marketing efforts, some companies try to reassure consumers that the businesses they patronize are willing to share their profits with charities, or community-related causes. Here, the benefit to the donor neither stems from the response of the direct receiver such as the charity, nor the ultimate receiver such as the patient to be cared for, but consists in the act of giving which yields a reputation that will distinguish the company from others. Major gifts are regularly donated in the areas of health care, education and the arts. Donation of major gifts is an industry by itself. The institutions and people receiving major gifts focus on the exchange relationship. It is the task of the fundraiser to find out what makes the exchange attractive to the major donor. The challenge of this professional's position is to create an exchange. Incentives a fundraiser can use is to provide a donor with the social status and tax-exemptions. It will also be his or her duty to determine the size and form of the gift the charity should aim for. This can be a difficult task, for instance if the gift is given in shares and depends on market revenues. To a donor interested in an exchange it is important to have a good estimation of the
Buchhandlung, p. 277. 221
value of the gift in terms of the value of the shares, etc. in order to present it in the company's reports.
Bücher's analysis explains the exchange taking place in fundraising from a positive point of view, but does he also give a hint for the question whether fundraising for charities such as a medical center is justified from a normative point of view? Here, the positions of a welfare state advocate favoring government funding of health care drift apart from someone who takes a more liberal stance. For instance, the welfare state advocate argues that charities lack ultimate accountability to the electorate, thereby creating the danger of arbitrariness. 25 This position ignores that only in a direct democracy ultimate accountability is given by way of a referendum. Further arguments against fundraising include that private charities often take a piecemeal approach without the possibility of recourse and that funds of charities are often insufficient. In order to add to the funding, special interest charities often get government subsidies. The more liberal politician would respond that due to the constraint of scarce resources government funding can also lead to a piecemeal approach, and that charities often work with tax brackets instead of government subsidies, thereby not reducing government funding but adding to it. An additional point of the welfare state advocate is that receiving charity can undermine the dignity of someone, who has to regard himself as the recipient of charity, rather than as a citizen whose rights include the right to health care. (Ackerman, op. cit. , p. 428.) Here, the liberal will mention the availability of health insurance and a minimum safety net provided by government for people with insufficient funds on their own. While we cannot refer to Bücher for normative guidelines in this controversy, we can still refer to his lesson from a positive point of view. In modern welfare states, the possibility of creating an exchange relationship in health care in order to create a high quality service or product should not be overlooked. While fundraising for charities in the health care sector has shortcomings on the normative side, from a positive point of view it can add to government funding rather than distract from it.
Nonmarket exchange is based on social custom. As Bücher has observed, nonmarket exchange might cease to exist if laws are introduced which replace the social custom. Similar observations can be made with respect to modern health care and are the topic of a book written by Richard A. Epstein who looked for unintended consequences of government regulation. 26 Epstein assumed altruistic behavior, but has not made explicit the element of exchange that can be involved in nonmarket transactions. He gave the example of hospitals, which occasionally have admitted patients with insufficient funds to emergency rooms. If those hospitals were required by law to admit all patients to emergency rooms, then at least some of them would be forced to close down for financial reasons. This, however, would lead to a reduction in the long-term supply of emergency rooms, and is thus contrary to the intentions pursued. (Epstein, 1997, op.
25 Felicia Ackerman. 1996. "What is the Proper Role for Charity in Healthcare?" Cambridge Quarterly of Healthcare Ethics . Cambridge University Press, Vol. 5, No. 3, Summer 1996, pp. 425-429, in particular pp. 427-428. 26 1997. Mortal Peril. Our Inalienable Right to Health Care? Addison-Wesley Publishing Company, Inc. Reading, Massachusetts. 222
cit. p. xiv).
A problem of undersupply might result if one relies entirely on donations which are based on altruism, even if this gives the person donating a sense of belonging to a group or the satisfaction of having performed a good deed. An example is the donation of organs for transplants. The current government regulation of the United States allows for donative transactions only. Epstein has illustrated how this practice leads to a persistent shortage of organs. 27 The most desirable organs come from people who died in accidents. It is estimated that the demand of organs would be met if all of those organs could be harvested. Currently, only 1/3 of suitable donors actually donate organs, and the number remained stable since about 1983. (Epstein, 1997, op. cit. pp. 240, 241). If the motivations of the donors are altruistic, then the incentive to give may be too weak, and the supply of donations may fall short of the needs of potential receivers. Epstein only saw the aspect of altruism, but did not explicitly recognize the element of exchange in charity. The question here is what incentive can be provided to stimulate the supply of organs.
In order to increase the numbers of donors it has been proposed to introduce a market. As organ transplantation technology has changed, increasing the rate of successful transplantations, Epstein has argued that contracts for the sale of organs should legally be allowed in the United States so that physicians and individuals could take advantage of it. While a market could remove the imbalance between organ supply and demand, there are several objections that prevent its introduction. From a normative point of view, the dignity of low income participants might be affected. There is the concern that organs of low quality might be offered from people who are pressed for money and the fear that this market will be open to criminal behavior. Furthermore, when asked whether the market or charity is the preferred alternative, physicians tended to choose the charity mechanism to deal with the constraints of scarce resources, while economists clearly preferred the market as a means of allocation. 28
As an alternative to a market for organs, as well as to the system of voluntary donations of organs, a type of nonmarket exchange of organs has been discussed which resembles the case of gift exchange as described by Bücher. An example of this proposal is the following:
27 The numbers of organs needed for transplant show a strong increase over time: in the US, there was a shortage of almost 14000 kidneys in 1988, the number increased to about 34000 in 1996. Similarly, the need for hearts increased about threefold from 1030 to 3706, as well as that for pancreas from 163 to 319. The shortage for livers and lungs was 616, resp. 69 in 1988 and showed a much stronger increase than the numbers for kidneys, hearts, and pancreas to 7239 resp. 2274 in 1996. Epstein, op. cit. , p. 240. 28 Victor R. Fuchs. 1996. "Economics, Values, and Health Care Reform." * The American Economic Review . March 1996, Vol. 86, No. 1. * Presidential Address at the one-hundred eighth meeting of the American Economic Association, January 6, 1996, San Francisco, California. 223
At age 18 (or 21), all men and women would be required, in the presence of a witness, to sign a statement declaring whether or not they are willing to be organ donors. There would be no government pressure to decide one way or the other. However, one criterion for being eligible to receive a donor organ would be whether or not the individual is signed up as a donor himself. Those who were not willing to donate organs would be placed lower on the waiting list than all individuals, however sick, who had agreed to be donors. 29
This plan can be expected to increase the number of donors, because those people who receive preferential treatment should an organ transplantation be required would have to be listed as suitable donors.
9.4 Summary and Conclusions
In his work Bücher has focused on exchange based on nonmarket transactions in the market economy. He has also analyzed nonmarket forms of exchange before the advent of markets. In studying nonmarket phenomena, Bücher built on a well- established tradition in German economic theory. Already von Thünen pioneered the idea of gift-giving through his will and Roscher, Bücher's predecessor, has pointed towards the economic importance of nonmarket exchange.
Bücher has shown how gaps in the own provision lead to nonmarket exchange in an economy, where markets for monetary exchange were lacking. He placed particular emphasis on the gift relationship, borrowing and lending, and the voluntary exchange of labor. All these forms have in common that the value cannot be determined easily. A set of social norms, Bücher himself speaks of social custom, makes it possible that the exchange takes place. Due to the reciprocal relationships, all potential participants are motivated to deliver a high quality performance. Those participants who do not adhere to the rules are faced with unfriendliness and exclusion from future exchange.
The relevance of Bücher's analysis to health economics is twofold. On the one hand, his examples can be applied to health care directly. He has observed that in particular in small villages it was often a social duty of neighbors to help each other with work on the fields, building homes, at harvest time, or in case of illness. This was a mutual exchange relationship. He also described the example of the Beguines who performed work in hospitals and health care in exchange for the protection of the city they lived in, so that a mutual exchange situation was given as well. As we have seen above, the condition of reciprocity ensures that a high quality of goods and services will be provided.
On the other hand, Bücher's analysis of gift exchange, borrowing and lending, and
29 Charles J. Wheelan. 1998. "To Get an Organ, Offer to Give One." The Wall Street Journal . December 29, 1998. 224
voluntary labor is relevant to health economics in an abstract sense. He has delineated reciprocity of exchange as the element that leads to high quality performance in a nonmarket exchange. We have considered four examples in health care, where this element is important. In the case of blood donations, reciprocity could be introduced by setting up a nonmarket exchange. This would probably lead to an increase in the quality of the blood donated. In the case of fundraising in health care, the nonmarket exchange consists in the act of giving which yields a reputation that will distinct the donating company in its marketing efforts from others. The discussion between liberals and welfare state advocates shows that fundraising for charities in the health care sector has shortcomings on the normative side, but from a positive point of view it can add to government funding rather than distract from it. A similar case is the hospital which occasionally has admitted patients with insufficient funds to emergency rooms and which would have to shut down for financial reasons, if it were forced to admit all patients with insufficient funds. The hospital might have accepted indigent persons for treatment because of altruistic reasons or because it wanted to have the reputation of a humane hospital. A law requiring the hospital to take all indigent persons would destroy the underlying exchange process, and the consequence would be less supply of emergency rooms than before. Bücher has shown that nonmarket exchange ceases to exist if legal regulation becomes too strong. In the case of organ donations, nonmarket exchange could be introduced if persons who are willing to donate an organ receive preferential treatment in receiving an organ if they need one. This type of nonmarket exchange could avoid the disadvantages of the market in this area and still increase the supply of organs which under the current system based on altruism is not sufficient.
What are the conclusions to be drawn? Voluntary help provided by friends and neighbors might increase if it is based on a mutual basis. If one could strengthen social norms in health care, then cost-containment might become less of a problem in this sector of the economy; however, there is substantial doubt whether modern social norms allow for enough room for nonmarket forms of exchange as described by Bücher to develop.
References
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Backhaus, Jürgen. Editor. 2000. Karl Bücher: Theory - History - Anthropology - Non Market Economics . Marburg: Metropolis. 225
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Backhaus, Ursula. 2000. "Nonmarket Exchange in Healthcare: Lessons from Karl Bücher." Backhaus, Jürgen. Editor. 2000. Karl Bücher: Theory - History - Anthropology - Non Market Economics . Marburg: Metropolis, pp. 337-362.
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Bücher, Karl. 1919 5. Arbeit und Rhythmus . Leipzig: Verlag von Emmanuel Reinicke.
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Bücher, Karl. 1922. Die Entstehung der Volkswirtschaft. II. Tübingen: Laupp'sche Buchhandlung.
Bücher, Karl. 1922. Beiträge zur Wirtschaftsgeschichte. II. Tübingen: Laupp'sche Buchhandlung.
Coase, Ronald H. 1937. "The Nature of the Firm." The Firm, The Market and the Law. 1988. Chicago: University of Chicago Press. pp. 33-56.
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Epstein, Richard A. 1997. Mortal Peril. Our Inalienable Right to Health Care? Addison- Wesley Publishing Company, Inc. Reading, Massachusetts.
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Senn, Peter. 2000. "Music and Economics: Reflections Inspired by Karl Bücher." Backhaus, Jürgen. Editor. Karl Bücher: Theory - History - Anthropology - Non Market Economics . Marburg: Metropolis. Pp. 73-112, pp. 74/75.
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228
Chapter 10
Friedrich Althoff's (1839-1908) Entrepreneurial
Approach to Health Related Sciences and Scholarship
Contents
10.1 Introduction: Friedrich Althoff, his Life and Work.
10.2 The Althoff System and Incentive Compatible Structures
- The Elements of the Althoff System
- Incentive Compatible Structures
10.3 The Althoff System and the Organization of Medicine
- Physicians' Continuing Education
- Foundation and Reorganization of Hospitals and Medical Schools
- Efforts to Reduce Infant Mortality
- Fighting Tuberculosis
- Hygiene
- Support of Medical Outstanding Research
10.4 The Althoff System from the Perspective of Property Rights Theory
10.5 Summary and Conclusions
229
10.1 Introduction: Friedrich Althoff, his Life and Work
Friedrich Althoff (1839-1908), the leading Prussian administrator in the Ministry of Culture and Science for more than a quarter of a century, created incentive compatible structures in which science and scholarship could thrive. The so-called Althoff System refers to the systematic approach standing behind Althoff's science policy. 1 This had an effect on all sciences, but here, we will concentrate on the implications for medicine and public health. 2 At the time, the industrial development had significant effects in relation to disease. For instance, new diseases emerged among the proletarian class of the cities, and this required new ways to view and treat these diseases. Althoff took patronage of medical research by supporting scholars with maverick ideas. He founded institutes and hospitals to further experimental and diagnostic research. Under Althoff, Germany introduced public health legislation, as in the case of combating tuberculosis. An increase in speed of scientific progress in the field of medicine, as well as other fields could be shown during and shortly after the era Althoff. 3 The relevance of the Althoff System concerns the organization of scholarship in general and in this sense of health issues in particular.
Althoff is a special case among the personalities whose work is discussed in this book. Whereas the others are selected because of their thoughts on `economics of health' as expressed in their writings, Althoff is portrayed as an exceptional organizer of science
1 The Althoff System has been analyzed from an economic perspective in the contributions to The Economics of Science Policy: An Analysis of the Althoff System , Jürgen Backhaus, guest editor, 1993. Journal of Economic Studies . Vol. 20, 4/5. See also the dissertation by Lode Vereeck, 1993, The Economics of Science and Scholarship. An Analysis of the Althoff System. Maastricht: Universitaire Press Maastricht. German translation by Ursula Backhaus: L. M. C. Vereeck. 2001. Das deutsche Wissenschaftswunder. Eine ökonomische Analyse des Systems Althoff (1882-1907). Volkswirtschaftliche Schriften, Vol. 514. Berlin: Duncker & Humblot. The Althoff System has been documented extensively by the historian Bernhard vom Brocke, editor, 1991, Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das System Althoff in historischer Perspektive . (History of Science and Science Policy in the Industrial Age. The Althoff System in Historical Perspective.) Lax: Hildesheim. 2 The progress in medicine has been well documented by Wolfgang U. Eckart, 1991, "Friedrich Althoff und die Medizin." (Friedrich Althoff and Medicine). Bernhard vom Brocke. Editor. Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das System Althoff in historischer Perspektive . (History of Science and Science Policy in the Industrial Age. The Althoff System in Historical Perspective,) pp. 375 - 404. 3 Relying on Schmoller and many others of his stature, Althoff took a holistic approach to health policy. He viewed health policy as an independent policy that systematically builds on other sciences. Science development led to new insights for more livable cities, improved architecture, and better infrastructure. 230
and scholarship who created incentive compatible structures to the benefit of medical science and its applications, next to the other disciplines. By making use of an informational network, he discovered talented scholars and made the way free for them to get ahead by cutting through cultural, religious or historical barriers. He was skilled in finding financial donors for particular projects, but his contribution went much further than fundraising. The funds, accumulated in foundations, since they had to be held in public bonds (war bonds), had lost their value during the First World War, but the organizational structures for research and teaching he created had a lasting value. They allowed talents to prosper that would otherwise never have come up through the strict academic structures.
In the introduction, a look at Althoff's life and career follows. In section 10.2, the focus is on incentive compatibility as well as the major elements of the Althoff System . In section 10.3, it is shown how the Althoff System raised the level of research, teaching, and training, in particular in the fields of medicine and public health. In section 10.4, these organizational structures and policies are analyzed from an economic point of view mainly that of property rights theory. The chapter ends with a summary and conclusions.
Friedrich Althoff was born in Dinslaken in 1839. He studied law at the University of Bonn and began his career as an interrogating magistrate and lawyer. He held several positions, including being justice at the Superior Court of Justice in Berlin. 4 His career was interrupted by the French-German War. Like Nietzsche, he served as a member of the nursing staff. After the war, he returned to practicing and studying law, before he accepted an offer in 1871 to become a legal advisor in the Committee for Religious and School Affairs in Straßburg.
In the Alsatian public administration, Althoff was responsible for the appointment of the academic staff at the newly opened University of Straßburg. He wrote the university's application and incorporation charter. In Straßburg, he met Schmoller for the first time. In addition to his administrative duties, Althoff held the position of extraordinary professor of French and Modern Civil Law at the University of Straßburg.
In 1882, Althoff was appointed to the Prussian Ministry of Culture and Science overseeing culture and research and teaching in particular universities. Here, he looked into faculty matters. His formal position was that of a referendary, but informally, he took on responsibility for all matters of science policy. In 1897, he became director of the first division, and in 1900, director of the scientific division for medical sciences. This position created the basis for Althoff's contributions to the organization and administration of institutions to further science and scholarship. His contributions with respect to medical sciences will be described below. Althoff became the leading public administrator of science in Prussia. Declining further promotions, and even the offer to become Minister of Culture in 1906, he remained in his position until 1907, when he
4 Compare Vereeck, op. cit. , pp. 29-31, chapter three. His documentation of the life and career of Althoff has been embedded in a description of the "Prussian Public Administration in the Second Empire." 231
resigned from office for reasons of bad health. Althoff died in Berlin in 1908.
Althoff was nationally and internationally recognized for his merits. 5 He received five honorary doctoral degrees, among them the honorary degree of law from Harvard University (1906). Harvard particularly emphasized his role in restructuring organizations in which instruction and research takes place. Althoff stood behind the innovative science policy in the Prussian administration. Important academic innovations included the introduction of the seminary method, the foundation of research institutes, and setting up a modern library system. In order to create new structures, he needed the support of the Emperor. The Emperor was also King of Prussia. As the Emperor, he had the prestige, as King, he had the power to create new structures. In the case of efforts towards the reduction of infant mortality, the name of the Empress added publicity to the cause.
Althoff's attempt was supported by Emperor William II (1888-1942), who wanted to modernize the Prussian universities and emphasized advanced technological research. He was also interested in relieving the Social Question . Under his reign, Prussia was developing from a rather backwards towards a rapidly developing, prosperous state with many opportunities for social shortfall. The systematic science policy with Althoff at its helm was central to the success of the Empire of William II. It was unique in Europe that Althoff had the right of immediate access to the Emperor (Immediatrecht). He could gain undistorted information of the Emperor's goals. An example of the fruitful cooperation between Althoff and the Emperor is the campaign against tuberculosis. Althoff's attempt to modernize the Prussian university system through the foundation of technical universities and the insistence of granting them academic privileges equal to those of traditional universities was supported by Emperor William II. This created new opportunities for the universities to conduct technological research and led to many innovations.
The outstanding success of the Prussian-German academic system at the end of the nineteenth and beginning of the twentieth century has been attributed to the policies by Althoff which have been traditionally referred to as the Althoff System . The Althoff System has been documented by Vom Brocke who attributed the number of Nobel Prizes which Germany received before and after the First World War to the conditions Althoff had created. 6 Nobel Prizes in medicine and chemistry were given to Behring
5 Peter Senn. 1993. "Where is Althoff? Looking for Friedrich Althoff in English Language Sources." In: Backhaus, Jürgen. Guest Editor. "The Economics of Science Policy: An Analysis of the Althoff System." Journal of Economic Studies . Vol. 20, 4/5, pp. 201-261, p. 210. 6 The contributions in the reader by Vom Brocke give an overview of the scope of Althoff's work in the humanities and the natural and social sciences. Bernhard vom Brocke. 1980. "Hochschul- und Wissenschaftspolitik in Preußen und im Deutschen Kaiserreich 1882-1970: Das "System Althoff." (University and Science Policy in Prussia and in the German Empire) Peter Baumgart, Editor. Bildungspolitik in Preußen zur Zeit des Kaiserreichs . (Policy of Education in Prussia during the time of the Empire) Stuttgart: Klett-Cotta, pp. 9-118, p. 11. 232
and van 't Hoff (1901), 7 Fischer (1902), Koch (1905), Ehrlich (1908), Kossel (1910), and to Philip Lenard (1905) for physics. Althoff had an important influence on shaping academic institutions for almost a century; his interest went far beyond medicine, encompassing natural sciences, as well as social sciences. He collaborated closely with leading German scholars, for instance Schmoller, who was able to gain the broad support of other professors to realize his ambitious program. 8 In this chapter, we are mainly interested in the organizational reforms and policies that created a financial basis and led to advances in the field of medicine.
10.2 The Althoff System and Incentive Compatible Structures
The Elements of the Althoff System
Despite his formal position, which did not allow him to shape the Prussian science policy, Althoff reached informal power through various strategies. Personal traits helped him to strengthen his position, as well as close contacts to the Emperor, but most important, behind his various strategies stood an approach referred to as the Althoff System . The term was originally coined by Max Weber, a fervent critic of Althoff, who described Althoff's policies as a system of connected points that work together. 9 By looking at the following categories, "academic information," "academic appointments," "academic freedom," and "financial resources," the essential elements of the Althoff System can be identified. (Vereeck, op. cit. , pp. 63 - 81).
Althoff ordered several statistical studies in order to obtain reliable information about the university system. (Vereeck, op. cit. , p. 63, footnote 146). In addition to this accumulation of quantitative data, he set up an informational network, which allowed him to discover talented scholars and to gain information which was not easy to come by. His network of confidential advisors encompassed academics, politicians, bankers and industrialists, and provided Althoff with qualitative academic information and information about financial resources. Through his network, he obtained information
7 This Dutch researcher was only enabled to conduct his research successfully after his appointment to Berlin. 8 The vantage point of launching his research program was the foundation of the Verein für Socialpolitik . Behind the decision stood the Althoff System . The entire field of social sciences served the purpose of social policy. Compare Jürgen Backhaus. 1989. "Schmollers Grundriß der Allgemeinen Volkswirtschaftslehre: Ein aktueller Klassiker." See in particular pp. 48-49. In: Jürgen Backhaus, Yuichi Shionoya, Bertram Schefold. Editors. 1989. Gustav von Schmollers Lebenswerk. Eine kritische Analyse aus moderner Sicht. (Gustav von Schmoller: his Life's Work. A Critical Analysis from a Modern Perspective). Düsseldorf: Verlag Wirtschaft und Finanzen, pp. 31- 76. 9 The term Althoff System was adopted widely and soon lost its original, negative connotation. Bernhard vom Brocke, 1980, op. cit., p. 111, footnote 313. 233
about the state-of-the-art in each discipline, about the areas where promising scientific progress was to be expected, and about the performance of specific researchers. This was in particular important with respect to his appointment policy. 10
Althoff took control of academic appointments at Prussian universities in order to employ the best scholars he could identify nationally and internationally. While his informal approach of centralized control and relying on a network of confidential advisors often met with criticism, Althoff received credit for the results he achieved. (Vereeck, op. cit. , p. 67). In a cautious manner, Althoff interfered with the selection procedures of traditional universities. He had observed that faculty proposals to fill vacancies not always reflected true scholarship of a candidate. Other aspects such as nepotism played a role. By relying on expert opinion of his informational network, Althoff was able to present the candidate who was best qualified for the position. In general, Althoff respected the wishes of the local faculties, but not, if he suspected the protection of vested interests. (Vereeck, op. cit. , p. 69). This gave local faculties an incentive to propose qualified candidates for a vacant position.
Althoff's appointment policy not only concerned selection procedures, but he also created new research facilities in order to attract talented scholars. "He opened academic jobs for members of previously excluded minority groups like Catholics, Jews, Social-Democrats and atheists. He also upgraded the secondary education for girls, so that by 1908 German women were allowed to study at Prussian universities." (Vereeck, op. cit. , p. 72). In putting up these topics, Althoff took advantage of his immediate access to the Imperial family. 11 Through this immediate access, for instance lunching with the Imperial family, he was able to put specific topics on the Imperial agenda, including women's access to universities, the tuberculosis research, or basic research, i. e. the Kaiser-Wilhelm-Gesellschaft (Emperor Wilhelm Society).
The protection of academic freedom as guaranteed by the constitution of 1850 was another important element of the Althoff System . By cutting through cultural, religious or historical barriers, Althoff made the way free for talented scholars to get ahead. They did not have to fear the competition from mainstream scholars for reasons of their opinion. With some exceptions, the Ministry of Culture protected scholars from "oligarchic faculties, academic interest groups, political parties and government." (Vereeck, op. cit. , p. 74). At the same time, the Ministry of Culture followed the parity principle and appointed scholars holding different views who had to work alongside each other. (Vereeck, op. cit. , p. 75).
Finally, the Althoff System is characterized by its innovative methods with respect to financial resources. Under Althoff, the Prussian state gave up its monopoly under
10 A list of persons belonging to the academic network of Althoff has been provided by Vereeck, op. cit. , pp. 65, 66. 11 Althoff, who came from a family of Westphalian farmers, declined to be knighted. As a rule, only persons of nobility could see the Emperor. This is why, as a rule, the Emperor knighted the provincial governors, whom he tended to recruit from academic commoners. 234
which the central state financed the university system. "Building on his confidential network, Althoff set up an innovative multi-source financing system, in which the Prussian state, local authorities, academies, industry, banking and private sponsors participated." (Vereeck, op. cit. , p. 75). Through skilled fundraising, Althoff was able to create new research institutes, to fund new academic chairs, and to finance particular projects. For a better coordination, he held the private financial sources under central control. In 1911, these funds developed into the Kaiser-Wilhelm-Gesellschaft . (Vereeck, op. cit. , p. 79). The funds devoted to the Kaiser-Wilhelm-Gesellschaft had to be public bonds.
Incentive Compatible Structures
Althoff created incentive compatible structures in research and teaching. Incentive compatibility means that agents in an organization face incentives to further the organizations' goals; since the understanding is that every agent follows his or her own goals primarily, and the more difficult it is to monitor his or her behavior, incentive compatibility requires that the agents' goals match as perfectly as possible the organizational goals. 12 Traditional university structures created many incentive incompatibilities, and it was Althoff's lasting achievement to resolve many of these by implementing new organizational forms.
Transaction costs depend on the specific constellations of institutions, in which transactions take place. They can take many forms. In principle, we distinguish between three types of costs, depending on the phases that any transaction has to go through. Information needs to be gathered, a contract, the performance of which can be monitored, needs to be negotiated and concluded, and this contract performance needs to be policed, that is monitored and sanctioned. Hence, we distinguish between information, contracting and policing costs. There are transaction costs in the market, but there are also transaction costs in the firm. 13 In this chapter, intrafirm transaction costs are most important, where the firm is the university as a whole or a specific research institute.
In choosing his policies, Althoff was aware of the economic properties of academic knowledge. (Vereeck, 1993, op. cit ., pp. 15-19). It is a characteristic of academic knowledge that we cannot know what is being discovered, and it is therefore difficult to assess the expected returns of research. Even the evaluation of new knowledge causes problems, as well as the measurement of academic performance. In order to study the effects of an improved academic structure, for instance on the rate of innovations, it is useful to clarify the nature of academic output. Academic output is a public good and as such it is characterized by non-rivalry in consumption. Under these
12 Compare Laurie J. Mullins. 1993 (3). Management and Organisational Behaviour . Great Britain: Pitman Publishing. 13 Ronald H. Coase. 1937. "The Nature of the Firm". In: The Firm, The Market and the Law . 1988. University of Chicago Press, Chicago, pp. 33-56. 235
circumstances, it would not make sense to exclude anyone from its consumption. According to Samuelson, non-rivalry in consumption and the principle of non-exclusion are the two characteristics of a public good. 14
In the case of a public good such as knowledge, the producer of knowledge will not be able to collect the full value of the knowledge produced, because someone else can use it without paying for it. For this reason, a free market is likely to under produce knowledge. Under certain conditions, it is feasible to exclude others from knowledge. An example is the patent system which makes it possible to exclude others from knowledge temporarily. By way of a patent, private property rights can be assigned for a certain time span. With the prospect of a patent which allows to reap the benefits of an innovation, people have a stronger incentive to produce knowledge. When the patent expires, the knowledge can be applied by others and applications can be imitated widely.
In some cases, patents are not applicable. The public good character of knowledge causes a problem for companies with large investments in research and development such as pharmaceutical companies. We have seen in the first chapter on Paracelsus that competition in the case of pharmaceutical companies is by way of innovation. Here, Schumpeter's argument can be applied that in such a case even a monopoly structure can be appropriate in order to give the company an incentive to invest in research and development leading to innovations.
Knowledge as a public good can also have external effects. Vereeck ( op. cit ., p. 17) gave the following example:
Medical research and instruction affect the individuals who suffer from particular diseases. It also creates important external effects, because it is a determining factor of public health. Although an individual might never be ill himself, public health may affect the costs of the labor force he employs.
The characteristics of public goods make it difficult to assess their value. Non- purchasers, or free-riders, cannot be excluded. They know what the public good is worth to them, but they have no incentive to reveal their true preferences. Due to the public good character of knowledge, residual claimancy is important in the field of research and development. 15 Vereeck argued that the value of academic output is
14 Paul A. Samuelson. 1954. "The Pure Theory of Public Expenditures." Review of Economics and Statistics . 36, pp. 387-389. 15 Levy showed for American institutions that basic research led to successful applications for defense and agriculture. Here, government served as a central monitor and residual claimant. He posed the question whether government should become more active as a monitor in the other sciences as well, and justified this with the following argument by Schumpeter: "Since some new knowledge is not patentable, perhaps special treatment is justified to encourage the provision of knowledge. The most dramatic case for special treatment is based on a famous argument made by Joseph Schumpeter. Schumpeter 236
even more difficult to assess, if external effects are present in the sense that private benefits and costs fall apart from social costs and benefits. ( Op. cit ., p. 18). The chain of effects is often long and indirect, and cannot easily be reflected by simple quantitative indicators. 16
Althoff's science policy systematically reduced transactions costs such as costs of information, monitoring and policing. For example, coping with infectious diseases was originally only possible by measures of quarantine. Quarantine was a common practice in Europe from the fifteenth century onward. 17 Again, the case of Marseille is interesting as an entire island was used for preventive quarantine before seafaring merchants could enter the port. Modern systems of vaccinating substantially reduced transaction costs. Similar, before boarding ships to the Americas would-be immigrants had to spent weeks of quarantine in the ports of Hamburg or Bremen, because the concentration on the small space of ships multiplied the risk of infectious diseases. Again, the transaction costs in this case of maritime transport could drastically be decreased by such health measures as vaccination. The history of immunology as a science began with the experiments of Louis Pasteur, whose institute was set up in 1888, and the experiments of the Berlin bacteriologists around Robert Koch. 18 As progress has been made with respect to bacteriology, parasitology, and pathology, immunizations became possible. As compared to quarantine, immunizations reduced transaction costs substantially. 19
maintained that a monopoly - because it is able to garner more of the benefits to the industry from R&D (because a monopoly is the industry) - will have an incentive to invest more heavily in R&D than would a competitive industry. In economic jargon a monopoly can internalize more of the R&D benefits than a competitive industry can. Although Schumpeter himself did not argue for special treatment of R&D on this basis, the argument could be made." David M. Levy. 1993. "Research and Development." David R. Henderson, Editor. The Fortune Encyclopedia of Economics . Pp 78-81, p. 80. 16 Vereeck showed this for citation counts, which he considered to be useful to get an overview of research topics, but which might be inappropriate indicators when deciding about the allocation of resources. The presence of citation cartels or the disadvantages to young scholars, who cannot possibly have a long list of citation quotations, are just two examples to show that citation counts can be flawed indicators when evaluating academic output. Op. cit ., p. 19 - 21. 17 Compare Kenneth F. Kiple. Editor. 1995(4). Cambridge World History of Human Disease. Cambridge, New Jersey: Cambridge University Press, p. 359.
18 Compare Kenneth F. Kiple. Editor. 1995(4), op. cit. Cambridge, New Jersey: Cambridge University Press, p. 127.
19 The opportunity costs of people, who are locked away and cannot perform their regular duties, are measured in time. Opportunity costs are a subjective way to determine costs. Opportunity costs become part of the transaction costs. Transaction costs are a form of costs that can have subjective and objective components.
237
Althoff changed the academic landscape and the organizational setting, in which medical research and training took place. This had implications with respect to the entire economy. Althoff's policies and strategies with respect to medicine are described in the next section. Considering the nature of academic knowledge, it is shown in section 10.4 that Althoff created incentive compatible structures. The economic theory of property rights is applied to explain his policies and strategies with respect to medicine and health care.
10.3 The Althoff System and the Organization of Medicine
Medical discoveries have also been made in other countries and in Germany outside of Prussia, but in Prussia, the state promoted science in a particular way. Althoff undertook efforts to improve physicians' training and introduced post university continuing education for physicians. His innovative multi-source financing system allowed the foundation of new hospitals and enlargement of existing institutions. Particular projects such as cancer research, the case of tuberculosis, a reduction in the mortality of newborns, or the introduction of measures of hygiene attracted Althoff's attention. He supported outstanding medical research. He opened career opportunities to gifted outsiders; many of them thanked him their career. While Althoff's personal style roiled many, he also received thanks. The physicians of the Charité hospital which Althoff turned into a large research organization wrote in the Berliner Aertze- Correspondenz of January 11, 1902: "We physicians are happy about the Althoff System und we are glad about the man who represents it." 20 In January 1900, the professors of the Charité decided to erect a bust of Althoff at the hospital's entrance. 21 The Althoff System advanced the organization and administration of the field of medicine and helped German medicine to achieve international recognition.
Physicians' Training and Post University Continuing Education
By the introduction of research professorships, dissertation and thesis requirements, Althoff wanted to improve the quality of research and teaching at universities. New
20 The original German quote reads as follows: "Wir Mediciner freuen uns des Systems Althoff und freuen uns des Mannes, der dieses System repräsentiert." Eckart, 1991, op. cit. , p. 275. 21 Bernhard vom Brocke. 1991. "Friedrich Althoff (1939-1908), Forschungsstand und Quellenlage, Bemühungen um eine Biographie." (Friedrich Althoff, a Documentation of Research and Sources). Bernhard vom Brocke. Editor. Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das System Althoff in historischer Perspektive . (History of Science and Science Policy in the Industrial Age. The Althoff System in Historical Perspective,) pp. 15 - 44, p. 22. 238
rules were directed towards improving the medical education of students. In 1901, the Imperial Chancellor decreed rules for examining and certifying physicians in the German Empire, as well as the requirement of a practical year for entry-level physicians, a measure which can be attributed to Althoff. 22
Althoff founded two large academies for practical medicine at Cologne (1904) and Düsseldorf (1907). Attached to the academies were teaching hospitals offering specialized education to entry-level physicians for performing their practical year. It was difficult for the teaching hospitals to find enough candidates. Beginning physicians had a free choice as to where they wanted to perform their practical year. They tended to prefer lucrative entry-level positions at practices or other hospitals to the positions offering a high-quality continuing education, but a lower salary. While at the central level these efforts of physicians' ongoing education failed, smaller academies for the ongoing education in practical medicine were also founded at the communal level. These smaller, local teaching hospitals operated successfully.
The Protestant church launched an institute for tropical medicine in Tübingen in order to educate missionaries and physicians who wanted to work as missionaries. In response to this effort, Althoff supported the foundation of a similar institute at the Cologne academy that would provide education in tropical medicine to certified physicians and Catholic missionaries.
Althoff promoted decentralization in medical practice and ongoing education of physicians. He gained the support of the Berlin surgeon Ernst von Bergmann (1836- 1907), who together with other Berlin physicians founded an association with the goal to further physicians' continuing education. One of Bergmann's goals supported by Althoff was that surgeons not only worked at university hospitals, but also at smaller local hospitals. Together with Bergmann, Althoff also prepared the foundation of a center for ongoing education in Berlin, where physicians could gain information on new procedures and methods. These efforts led to the foundation of a teaching hospital, the Kaiserin-Friedrich Haus für das ärztliche Fortbildungswesen (Empress Friedrich House for Continuing Medical Education) in 1906, for which Althoff could gain substantial private support from industry and financial institutions in Berlin.
Foundation and Reorganization of Hospitals and Medical Schools
Under Althoff, important new foundations of hospitals and reorganizations of existing health care centers took place, as well as the foundation of new research facilities and medical schools, for which he was able to gain the financial support of various private and public sources. This allowed him to offer career possibilities to outstanding researchers whom he had discovered first through his thorough study of various informational sources and a network of confidential advisors. Among the new
22 Eckart, op. cit. , p. 376. Due to these measures, the quality of medical care was expected to rise. 239
foundations of hospitals were the Berlin Imperial Prussian Institute for Infectious Diseases (1891), the Prussian Mental Health Clinic in Halle (1891), the Children's Hospital in Breslau (1895), the Public Institute for Serum Research and Testing in Steglitz (1896), the Marburg Institute for Experimental Therapy (1899), the Imperial Hygiene Institute in Posen (1899). (Eckart, op. cit ., p. 379).
The neurological institute of biology was a private foundation, which Althoff attached to Berlin University. The faculty at Berlin resisted Althoff's plan. With the financial support of one million Mark by the Krupp foundation it could later be turned into the Kaiser- Wilhelm-Institute for neurological research.
Since 1891, Althoff pursued the reorganization of the Charité in Berlin. This work included the acquisition of suitable plots of land, supervision of construction activities, taking place from 1897 until 1916, and securing the financing of rebuilding the hospital complex. 23 It was Althoff's special wish that an institute for cancer research was added to the Charité to be headed by his protégé Paul Ehrlich. (Eckart, op. cit ., p. 381).
Althoff supported the transformation of the Academy at Münster into the Westfalian Wilhelms-University and facilitated the introduction of medical studies. (Eckart, op. cit ., p. 381).
In Shanghai, Althoff supported the foundation of the German Medical School (1907), financed by the Berlin banker and industrialist Leopold Koppel. 24 The German Medical School was in operation until 1937, educating many Chinese students who often finished their studies at German Universities. After submitting and defending their dissertations, 145 foreign students, all of them physicians, went back to their home country. (Eckart, op. cit ., p. 382).
The incentives Althoff used in order to finance academic research included the presentation of honors and licenses to the donors. An example is Althoff's method of financing a new chair in ear, nose and throat diseases at the University of Marburg. He convinced a retired, extraordinary professor in medicine, Otto Körner, who was independently wealthy, to renounce his pension in exchange for an honorary and unsalaried professorship. The money of the pension was used to finance the new chair. (Vereeck, op. cit. , p. 76). Similarly, in order to cover the deficit in the construction of the Marburg Polyclinic, Althoff arranged a prestigious mark of honor to be given to the publisher August Scherl who made a contribution of 100,000 Mark which covered the deficit. 25 In the case of Emil Behring's research at the Institute for Experimental
23 In order to illustrate the creativity and opportunism by Althoff to gain financial means, Lode Vereeck has reported that Althoff used the boycott of the Charité Hospital by the Health Insurance Funds and the Social Democrats in order to obtain more funds for the reorganization of the hospital from the state. Op. cit. , p. 76. 24 The Koppel foundation of one million Mark financed several projects, and also part of the international professorial exchanges. Vereeck, op. cit. , p. 79. 25 Thanks to the tactical moves by Althoff, the Emperor distinguished Scherl with 240
Therapy and Hygiene at Marburg, Althoff obtained funds for the Institute from the Hoechst Corporation in return for the license to mass produce the anti-diphtheria serum. As Vereeck has noted, this was not only in the interest of the Hoechst Corporation, but also in the interest of the Prussian state. The latter would set the price on the serum, and by encouraging wide adoption, it would promote public health. (Vereeck, op. cit. , p. 81).
This selection of hospital foundations and reorganizations illustrates Althoff's efforts with respect to fundraising. 26 Through new foundations and reorganizations he was able to create career opportunities for outstanding scholars. He encouraged medical research and public health policy, in particular in the areas of infant mortality, tuberculosis, and hygiene. By hiring outstanding professionals, he created the infrastructure for new research opportunities. At the same time he established the infrastructure to promote public health.
Efforts to Reduce Infant Mortality
In Prussia and in the German Empire, infant mortality reached its peak late in the 1870ies, while already being on the decline in England and Wales, France, and Sweden. (Eckart, op. cit ., p. 382). Diphtheria was considered an important cause of infant mortality. The Empress became engaged and undertook efforts that would lead to a reduction in infant mortality. Her advisor was Philipp Biedert (1843-1926), a nutritional specialist, who saw diphtheria not as the major cause of infant mortality, but who also included social factors as possible causes. (Eckart, op. cit ., p. 383, note 43). In 1905, Althoff asked the general pediatrician Otto Heubner (1843-1926), who followed a different approach, to participate in the plans of the Empress. In an autocratic move, Althoff offered him a chair at the Charité. In order to finance the project, Althoff created a foundation of which he became chairman and he was able to gain the financial means from industrialists and bankers. In 1909, the teaching hospital and research institute Kaiserin-Auguste-Victoria-Haus zur Bekämpfung der Säuglingssterblichkeit (Empress Auguste Victoria House to Fight Infant Mortality) could be opened. Althoff became chairman of the board. At the same time, a journal was founded for publication of research results on the causes of infant mortality and on measures of its reduction.
the "Red Eagle." For a detailed explanation of Althoff's strategy see footnote 211, Vereeck, op. cit. , p. 80. 26 Vereeck has provided a list of private foundations established under Althoff. Several of the funds are devoted for medical purposes. Vereeck, op. cit. , footnote 208, p. 79. 241
Fighting Tuberculosis
The campaign against tuberculosis resulted from the close cooperation between Althoff and the Emperor. When in 1902 the first international tuberculosis conference took place, Althoff used the opportunity to launch the formation of an international central committee for the reduction and eradication of tuberculosis. Its main task was to edit the international journal Tuberculosis . Editor of the bilingual journal (French and German) was Gotthold Pannwitz (1861 - 1926). Five internationally renowned tuberculosis scholars were members of the editorial board, as well as Althoff himself. Later, the journal also appeared in the English language.
In November of 1908 an obituary notice of Althoff's death by G. Pannwitz was published in three languages in the journal Tuberculosis . In it Pannwitz states that Althoff was "the founder of the International Antituberculosis Association". He also states that Althoff received the "Gold Medal for Tuberculosis" [53, p. 445]. This activity and recognition is more evidence for a lasting contribution in international affairs on the side of goodwill towards all mankind. Adolphus Harnack's speech at Althoff's funeral is also printed in English in the same issue of Tuberculosis . Although the speech is in the spirit of de mortuis nil nisi bonum , he does mention that Althoff's conscientiousness was often misunderstood, that he was not easy to understand and that he was an opportunist - judgments which certainly stand up in the light of present-day scholarship. (Senn, 1993, op. cit ., p. 210).
The foundation of hospitals in order to heal tuberculosis was still a responsibility of the national committee for tuberculosis that was sponsored by Althoff as well. In 1901, 14 public and 16 private hospitals in order to heal tuberculosis had been established, 19 were under construction and plans called for an additional 16 institutions. (Eckart, op. cit ., p. 385).
Hygiene
Since 1901, Althoff promoted public health by establishing research institutes for medical hygiene. These were either set up as government institutions at the local or regional level, or, typically, connected to universities. Based on the Imperial Vaccination Law of 1874, the hygiene institutes also promoted vaccination of the population, but their task went beyond the promotion of public health. 27 According to
27 The German Empire framed the Imperial Vaccination Law in 1874, and its provisions deserve study and imitation. It contained the following provisions: (1) Each child shall be vaccinated within the calendar year of its birth, unless it has passed through an attack of variola. (2) Every pupil shall be revaccinated when 12 years of age, if he has not had variola within the past five years. (3) Every vaccinated person must present himself to the physician who vaccinated him 242
the hygienist Max von Pettenkofer (1818 - 1901), it was Althoff who established the field of hygiene at the University level. (Eckart, op. cit ., p. 385).
Support of Outstanding Medical Research
Althoff took patronage of medical and other research, in particular maverick ideas. He supported Rudolf Virchow (1821-1902), whose work in cellular pathology formed a cornerstone in the fight against many infectious diseases including tuberculosis. Robert Koch (1843-1910), another protégé of Althoff, laid the foundations for a scientific approach to bacteriology. In 1882 - 83 he identified tuberculosis and cholera bacteria. In consequence of his research and its subsequent discoveries, Prussia introduced a public health legislation that was directed towards the goal of eradicating tuberculosis as a disease. In 1905 the Emperor held the international Tuberculosis congress in Berlin chaired by Althoff. During the Tuberculosis congress, Emil Behring (1854-1917) announced that he had discovered an immunization substance which would prevent bovine tuberculosis. Behring had been called by Althoff to head the Hygienic Institute at Marburg. Another outstanding medical scholar whom Althoff gave a research institute was Paul Ehrlich (1845-1915), a student of Koch, who was famous for his research in experimental therapeutics. By giving him a research institute, Althoff created the environment he needed to conduct his research. A look at the biographies of these outstanding medical researchers shows how important Althoff was for their success by creating the appropriate environment for their work.
Rudolf Virchow (1821-1902)
Virchow studied medicine at the Friedrich-Wilhelm Institute in Berlin and began to work at the Charité Hospital in Berlin, after he had obtained his degree. He graduated in medicine at the University of Berlin (1843), where he became prosector of anatomy. He shared the companionship with other scholars, for example with Henle, Schwann, Brücke, Helmholtz, and Du Bois-Reymond, who later became discoverers of important medical facts as well. 28 In 1847, he became lecturer at the University of Berlin. Soon afterward he was commissioned by the government to investigate the causes and treatment of typhus in Silesia. In his report he severely condemned the Prussian government for its lax hygienic and social laws, and he made a strong appeal for a democratic form of government in Silesia. At that time, he founded the successful medical journal Archiv für pathologische Anatomie und Physiologie (Archive for
between the sixth and eighth day after vaccination. (4) Medical certificates proving successful vaccination at the legal ages shall be preserved by parents and guardians. "Vaccination." 1923 (2). The New International Encyclopedia . New York: Dodd, Mead and Company. Vol. XXII, pp. 841-843. 28 See the essay: "Virchow, Rudolph." 1923 (2). The New International Encyclopedia . New York: Dodd, Mead and Company. Vol. XXIII, p. 175. 243
Anatomy and Physiology), 29 which he edited throughout his life. Next to this journal, he also established a political journal, Medical Reform , but this was a short-lived publication. 30 As another forum for his political opinions, he founded a democratic club, where he frequently gave speeches. Due to his antimonarchical views, he was expelled from Prussia in 1849.
In the same year, Virchow accepted a call to the chair of pathological anatomy in Würzburg (Bavaria). His lectures at that university were widely popular for the novel views which he advanced, particular in cellular pathology. He gained a high reputation for his work. In 1856, he was recalled to Berlin. It was Althoff, who insisted on calling Virchow back to Berlin, despite of his antimonarchist views. In Berlin, a pathological institute was provided for him. He occupied the chair of pathological anatomy, until his death in 1902. In 1858, he published Cellular Pathology and gained an international reputation. (Lelland J. Rather, op. cit. , p. 152).
In 1861, Virchow became a member of the Berlin city council. He did much to improve city conditions, in particular with respect to public health and sanitary conditions. In 1862, he was elected Deputy to the Prussian Diet and soon took over the leadership of the opposition. He was one of the founders of the progressive party (Fortschrittspartei). Later, he became also a member of the left-leaning of the two German liberal parties, of the Free Thinkers (deutsch-freisinnige Partei). From 1880-1893 he served in the Reichstag. Virchow opposed the "blood and iron" unification policies of Bismarck, but took his side in the so-called "Kulturkampf." (Lelland J. Rather, op. cit ., p. 152). During the wars of 1866 and 1870-71, the Franco-Prussian War, Virchow formed and trained hospital corps and ambulance services. He managed the Berlin military hospital, set up hospital trains, and oversaw the sanitary arrangements of the troops in the field. After the war ended, Virchow became a member of the sanitary bureau of the city of Berlin. His task was to solve the problem of disposal of the sewage. Under his direction, huge sewage farms utilizing sewage for agricultural purposes were built and operated. 31 On the one hand, sewage farms were planned so that they would remain adequate with the growth of the city, and on the other hand, at the same time, they had to generate sufficient revenue, so that their maintenance was paid for.
Virchow remained active in research. He made contributions in pathology, hygiene, and
29 The journal was also known as Virchow's Archiv . See "Virchow, Rudolf," op. cit. , p. 175. 30 Lelland J. Rather. 1995. "Virchow, Rudolf Ludwig Karl." Collier's Encyclopedia . New York: Collier's, p. 152. 31 "The crops best suited to sewage farming are perennials like the grasses, although vegetables and a variety of other crops have been successfully grown with sewage. The experience of the Berlin farms shows that with proper care there need be little danger to health in using raw sewage for this purpose. In order to use the sewage most regularly and to the best advantage, separate areas of land must be provided for rotation in application." "Sewage Farming." 1923(2). The International Encyclopedia . New York: Dodd, Mead and Company. Vol. XX, p. 754. 244
also excelled as a parasitologist, but he did not readily accept the newer views and discoveries of Koch and Behring with respect to toxins and antitoxins. ("Virchow, Rudolf," op. cit ., p. 176). By praising Virchow's contributions along with those by Koch in the fight against infectious diseases, Althoff finally succeeded to integrate Virchow's contributions into the new field of microbiology. (Eckart, op. cit. , p. 390).
Virchow was politically active and a member of the Prussian Diet. When in 1897 the Emperor wanted to fire Leo Arons, a lecturer at the Philosophical Faculty, for his critical views of public institutions, Virchow heavily criticized Althoff. Arons was Jewish and a Socialist. Althoff did not follow the wish of the Emperor to fire Arons immediately, but created the legislative basis on which Arons could be fired a year later. This was a controversial measure, referred to as Lex Arons . (Eckart, op. cit ., p. 388). After Virchow withdrew from politics at the national level, he kept his seat in the state diet until his death. He was also a distinguished archaeologist, who contributed greatly to the success of Heinrich Schliemann.
Robert Koch (1843-1910)
Robert Koch started out as a district physician in West Prussia. Althoff was decisive in enabling Koch's career. 32 In 1890, after having discovered Tuberculin, Koch asked the Prussian Ministry of Culture to establish a research institute with a clinical part, so that he could combine experiments in bacteriology with research and therapy of infectious diseases. In order to pursue the new endeavor, he wanted to give up leadership of the Berlin Hygiene Institute of which he had been director since 1885. The Prussian Diet approved the project and the Ministry of Finance provided an amount of 500 000 Mark for building the Institute of Infectious Diseases. However, while the Prussian Diet was in the process of approval for annual running costs of 165 000 Mark for the almost finished institute, the early successes of Tuberculin began to dissipate. Outspoken opponents were against approving funds for the institute, among them Virchow. In a patriotic speech, Althoff convinced the majority of the members of the Diet to vote for approval of the institute's annual funds. He stressed Virchow's role in the advancement of microbiology and his fight against infectious diseases, and was thereby able to reduce Virchow's opposition to the project. At the same time, he emphasized Koch's role in innovative bacteriology, which could lead to progress in healing infectious diseases. (Eckart, op. cit ., p. 391). In 1891, Robert Koch became the director of the new institute; among its 25 employees were Emil Behring and Paul Ehrlich, both protegés of Althoff.
Emil Adolf Behring (1854-1917)
Behring studied medicine in Berlin. He became an army surgeon and started research
32 Vom Brocke wrote that without Althoff, Koch had never been able to receive a chair in Berlin, to become director of the Institute of Infectious Diseases, and to become a member of the Academy. 1980, op. cit ., p. 93. 245
on specific bacterial toxins. This work he continued as an assistant of Koch at the Institute of Infectious Diseases in Berlin. Together with Shibasaburo Kitasato (1859- 1956), another assistant of Koch, Behring showed the formation of antitoxins. (Eckart, op. cit ., p. 393). This marked the beginning of blood serum therapy. Behring wanted to ward off infectious diseases with antitoxins to be produced by the body itself in an immune response. Althoff met Behring in 1892 when he presented his research on tetanus. In 1894, he appointed him as a professor at the University of Halle, but Behring was not happy with the environment. He rather wanted to be at Marburg, but the faculty rejected him. After threatening to take an appointment outside of Prussia, Behring received in 1895 a call from Althoff to head the Hygienic Institute at Marburg which was modeled after the Institute Pasteur in Paris. 33 Behring discovered the diphtheria antitoxin and made contributions to the study of immunity. Diphtheria was a major cause of death for children. Early in the nineties, his work led to the production of a vaccination serum for diphtheria and tetanus. In 1901, Behring received the Nobel Prize in medicine for his discovery of the diphtheria serum. He devoted the money associated with the Nobel Prize to Marburg tuberculosis institutions. In the same year, he also received a Prussian hereditary knighthood. In 1904, a contract with Hoechst was concluded and the private Marburg research laboratories became independent as Behringwerke . When the contract with Hoechst ended, serum was produced in Marburg. In 1905, Behring discovered a substance from the tuberculosis virus, which could be used in immunizations to prevent bovine tuberculosis. In 1913 he discovered a new diphtheria serum. His major publications included Die Blutserumtherapie (Blood Serum Therapy), 1892, Bekämpfung der Infektionskrankheiten (Fighting Infectious Diseases), 1894, and Beiträge zur experimentellen Therapie (Contributions to Experimental Therapy), 1900. 34 In his book on diphtheria, Behring thanked Althoff for his help and support. 35
Paul Ehrlich (1845-1915)
Althoff gave Paul Ehrlich an institute where he could perform his medical research. Being Jewish, he had worked at Koch's institute with little hope of a regular university career. Paul Ehrlich was famous for his research in experimental therapeutics. He studied at Breslau, Strassburg, Freiburg, and Leipzig, receiving his degree of M.D. in
33 Behring kept close contacts to the Institute Pasteur and to French medicine. For more details, compare Harry W. Paul. 1990. "Die Entwicklung der Forschungsförderung im modernen Frankreich. Vierhaus, Rudolf, Bernhard vom Brocke. Editors. Forschung im Spannungsfeld von Politik und Gesellschaft. Geschichte und Struktur der Kaiser-Wilhelm-/Max-Planck-Gesellschaft. Aus Anlaß ihres 75jährigen Bestehens. (Research between Politics and Society. History and Structure of the Kaiser-Wilhelm-/Max-Planck-Gesellschaft ). Stuttgart: Deutsche Verlags-Anstalt, pp. 695 - 725, p. 705. 34 "Behring, Emil Adolf." 1923 (2) The New International Encyclopedia , op. cit. , Vol. III, p. 76. 35 Zeiss, H. und Bieling, R. 1941. Behring. Gestalt und Werk . (Behring. Man and Work). Berlin: Bruno Schultz Verlag, p. 93. 246
1878. In 1885 he was appointed assistant in the University clinic at Berlin, where he became Privatdozent in 1889. In 1890, he became a member of the new Institution for Infectious Diseases and professor in the University. In 1896, he was appointed director of the Royal Institute for Serum Research at Steglitz. When it became too encumber some to work at the small institute, Althoff got in contact with the mayor of Frankfurt for funding the new institute. He succeeded and the city of Frankfurt almost entirely financed the new institute. After the institute had moved to Frankfurt, in 1899, it became the Royal Institute for Experimental Therapeutics . It was part of the city hospital of Frankfurt and in the vicinity of Hoechst Farbwerke , the main producer of vaccines at the time. Althoff succeeded to gain the financial means from a foundation for building a larger institute, the Georg Speyer-Haus which was opened in 1906. The financial means provided also covered running research expenditures for experimentation.
In a letter to Althoff, Ehrlich wrote: "I personally owe you my entire career..." 36 Among many orders and decorations, he received honorary degrees from Göttingen, Chicago (1904), Oxford (1907), and Breslau (1911). In 1908, he received the Nobel Prize for medicine, together with Metchnikoff. Among his contributions are important studies in the histology of the blood and in immunity reactions and research work in cancer. He also did research work on the sleeping disease and discovered salvarsan and neosalvarsan, arsenic compounds, of great efficacy in the treatment of syphilis.
The examples presented in this subsection illustrate how the Althoff System operated in the domain of medicine and health care. Althoff had a vision of the direction in which to go in the domain of medicine and health care. He took different measures to realize his objectives. One of them was regulation of examination and certification of physicians. A second measure was foundation of new institutes, such as a teaching hospital, two academies for practical medicine, an institute for education in tropical medicine, with a number of new hospitals, general as well as hospitals for healing tuberculosis, an institute for neurological research, and an institute focusing on the reduction of infant mortality. As a third measure, Althoff undertook reorganization and extension of existing institutes, such as the Charité hospital in Berlin and the introduction of medical studies at the University of Münster. He used his informational network to track important new developments in medical research and to identify talented researchers, such as Koch, Behring, Ehrlich, and Virchow. He used his authority to push through their appointments. In the process, academic freedom and diversity were enhanced. Opportunities for innovative research and teaching were created and could be realized thanks to Althoff's ingenuity in attracting finances from various public and private sources.
It is difficult to directly trace the effect of the Althoff System with respect to the output it produces. In the area of medicine and health care, the output is an improvement of the health states of people. Because of the difficulty of direct measurement, an indirect approach is proposed. In what follows, the Althoff System will be interpreted from the perspective of property rights theory.
36 In the original German quote this reads as follows: "Ich persönlich danke Ihnen meine ganze Karriere..." Eckart, op. cit ., p. 398. 247
10.4 The Althoff System from the Perspective of Property Rights Theory
Behind Althoff's science policy stands a systematic approach that has been subject to investigation. 37 By studying the Althoff System , insights into the institutional conditions for productive academic research can be gained. 38 The economic theory of property rights of Alchian and Demsetz is used here as a paradigm in order to understand how the Althoff System works. 39
Alchian and Demsetz have identified three bundles of property rights which characterize the structure of a firm that will lead to the efficient production of output and behavior of the firm. The same set of property rights can be used to analyze academic organizations as producers of research and teaching. The Althoff System can be interpreted as a policy transforming the traditional set of property rights into academia. The conditions and basic property rights with respect to the Althoff System have been summarized as follows:
The first bundle of three rights concerns the use ( usus ) of resources in the firm and involves more specifically the: (1) control over inputs and outputs; (2) control over the composition of the membership of the production team (hiring and firing); (3) consolidation of all contracts a firm enters into the hands of one contracting agent.
The second bundle consists of just one right ( usus fructus ) and involves the (4) right to claim the residual profit after all expenses have been met.
Finally, the third bundle ( abusus ) represents (5) the prerogative to change the organization, sell it or liquidate.
37 See, for instance, the contributions to the conference volume: "The Economics of Science Policy: An Analysis of the Althoff System." Jürgen Backhaus. Guest editor, 1993, op. cit. Althoff's program has been reprinted in the contribution by vom Brocke, 1991, op. cit. , pp. 15-44. 38 Compare the dissertation by Lode Vereeck ( op. cit. ). He investigated the influence of institutional change on behavior of scholars and productivity, and worked out the conditions for an efficient allocation of academic resources. 39 In order to describe the behavior of an organization, it is useful to look at the property rights structure of the organization. If a change occurs, the members of the organization will respond to the change by exercising the prerogatives they have. In economics, these prerogatives are called property rights. Armen A. Alchian and Harold Demsetz. 1972. "Production, Information Costs, and Economic Organization." American Economic Review . 62, pp. 777-795. 248
This constellation of property rights will emerge if both of the following conditions are met: (1) Team production is more productive than individual production. This implies that the individual contributions to the total product are not separable and there is consequently a measuring problem in determining the individual marginal productivity of the team members. (2) The marginal productivity of the individual factors of production is best determined by monitoring input performance.
If both of these conditions are met, the classical firm is likely to arise. The classical firm is characterized by the specific bundle of property rights mentioned above. Its rationale is the composition of several inputs into one production process. The need for this composition is also the reason for the requirement that all contracts have to be concentrated with one decision maker. 40
In looking at the process of academic research and teaching in general, and medicine in particular, we should first try to determine whether the two conditions are met. With respect to the first condition, the question is whether individual contributions can be separated in the production process or whether it is more effective to produce in a team. In the simplest case, there is a single professor who performs his own research. Complicated conditions, however, require a team, and most likely a more intricate team structure. The rise of the medical profession required large clinical compounds so that the value of new medical procedures and drugs could be tested by comparing a large number of similar conditions. Institutes were required that could not be sustained by the traditional university system, but were supported by and sometimes attached to industry. The second condition is also met, because the marginal productivity of the different members of the team is difficult to measure in output terms, hence input behavior is typically observed. Hence, in the case of academic production both conditions are met for the classical firm to arise. In what follows, we take a look at the Althoff System and interpret the changes it brought about in the academic organization according to the five property rights summarized above. Althoff's strategy is seen here as a set of interventions analogous to the role played by the owner/manager of a firm, who uses his property rights in setting up and running a firm.
Concerning the first bundle of property rights about the use of resources in the firm we can note that Althoff took control over inputs and outputs of the academic production process in various ways. Traditional restrictions at the universities hindered the flow of personnel inputs. Althoff opened up the traditional university system to talented researchers belonging to minorities and to the outside by facilitating travel and introducing international exchange programs for professors. 41 These measures were
40 These conditions are according to Jürgen Backhaus. 1993, op. cit ., pp. 15, 16. The conditions mentioned are necessary, but not sufficient conditions. Other alternative constellations of property rights might exist which are equally efficient. The necessary conditions mentioned indicate why the classical firm has emerged in the present form. 41 The letter by Ehrlich, in which he thanked Althoff for his career, is at the same 249
directed towards improving the quality of academic output. As has been shown in section 10.2 above, academic output is a public good loaded with externalities and, hence, it can not be evaluated easily. In the traditional university system, the main instrument of control remains the enforcement of professional standards by peers which occurs in a self-regulating environment. (Jürgen Backhaus, 1993, op. cit ., p. 17). In his fight against slack and nepotism, Althoff stimulated the system of peer control. By requiring faculty members to write research reports listing publications and projects undertaken he reached more transparency, a measure directed to reduce slack. In some cases, however, he added qualified outsiders to the faculty or researchers who followed a different approach. An example is the appointment of the general pediatrician Otto Heubner, whom Althoff, in an autocratic move, had offered a chair at the Charité. Heubner followed a different approach from his colleagues concerning the methods to reduce infant mortality. Heubner's influence in opening the Kaiserin- Auguste-Victoria-Haus zur Bekämpfung der Säuglingssterblichkeit (Empress Auguste Victoria House to Fight Infant Mortality) was substantial. (Eckart, op. cit. , p. 383). Another example is the appointment of Behring. The faculty at Marburg had rejected Behring for three times, before Althoff called him to Marburg.
Althoff was a successful fundraiser, who tapped financial resources from industry and banking, private sources, communities, and higher state levels. 42 For instance in a period of four months he convinced German sponsors to grant a total of 1.5 million marks for the Empress Friedrich Institute for Postgraduate Education in Medicine in Berlin (1906). (Vereeck, op. cit ., p. 78). The new institute structure, supported by Althoff as an institutional response to further scientific developments, required more funds than the traditional university system. Financing institutes and special projects was a challenge, Althoff met in many ingenious ways. For instance, at Marburg Althoff financed a new chair in ear-, nose-, and throat diseases without the support of the Minister of Finance. By convincing Otto Körner to renounce his pension for an honorary professorship, he was able to endow the chair. The incentives Althoff used in order to finance academic research included the presentation of honors and licenses to the donors. (Vereeck, op. cit., p. 76). In order to coordinate the different sources of funding, Althoff created a central fund which later became the Kaiser-Wilhelm-Gesellschaft . (Vereeck, op. cit. , p. 79). Despite Koch's success in research on tuberculosis, the illness remained a disease threatening broad circles of the population. (Eckart, op. cit. , p. 384). By centralizing funds, Althoff brought the so-called Heilstättenbewegung , a movement and fund-drive of ordinary citizens to finance hospitals and treatment of tuberculosis and lung-related diseases, to a success. Initiated by the internist von Leyden, the movement reached the attention of the Chancellor of the Empire, but suffered from splintering in many different local efforts, before Althoff undertook action.
Althoff's efforts at directly monitoring output involved the establishment of an
time a strong criticism of the traditional university system. Ehrlich belonged to a minority and had thus almost no access to a regular university career. 42 As has been shown in section 10.2, academic research and teaching are public goods which produce externalities. This implies that the academic production process is difficult to finance. 250
informational network. In medicine, the size of the informational network was substantial. In the case of the appointment of Behring, Althoff contacted the following experts: A. Laubenheimer, professor at Farbwerke Hoechst ; R. Pfeiffer, expert in bacteriology; H. Schaper, director of the Charité hospital and physician general; W. Körte, surgeon; E. Hitzig, psychiatrist; H. Bonhoff, later to be hired by Behring; J. Freiherr von Mehring, internist; E. Harnack, pharmacologist; E. Kuelz, physiologist; Carl Fränkel, hygienist. Kuelz and Fränkel both belonged to the Marburg faculty. 43 In the case of appointments, Althoff sought the advice of different experts in the same or closely related fields. He established an informational network in virtually every discipline. While the benefits are better information, networking does not come without cost. It is a time-consuming affair as it consists in extensive correspondence and meetings necessary for building up personal relations. Moreover, this feature of his work sometimes met with fierce criticism, in particular when it was perceived as a threat to academic freedom.
Althoff took direct and indirect control over the composition of the membership of the academic production team. The traditional faculty had the co-optation right. This means that the professors of the various disciplines forming the faculty would vote on a new appointment and decide by majority rule. While the final appointment was by the sovereign of a country, it was expected that the sovereign followed the faculty's recommendation. The co-optation right was an important safeguard of academic freedom, but had a severe drawback. It enabled nepotism, a tendency towards hiring mediocre candidates who would not pose a challenge to the old faculty members. By overruling the majority vote of the faculty, Althoff put an end to such practices. If he had the better qualified candidate, he simply would appoint him without taking the preferences of the faculty into account. In this sense, Althoff took direct control over the composition of the membership of the faculty. He also took indirect control, because he gave the traditional faculty an incentive to seek information and to subsequently hire the best qualified candidates available in order to secure its right of co-optation. In some cases, when he wanted to push a certain candidate, Althoff tried to provide the faculties with information before a decision was taken.
Towards the end of the 19th century, the academic production process underwent a change. The old faculty structure of individual professors loosely connected to each other could no longer deal efficiently with the new challenges posed by industrialization. The industrial development had significant effects in relation to disease. New diseases emerged among the proletarian class of the cities, and this required new ways to view and treat these diseases. In order to meet these challenges, Althoff created new organizations in health care. He founded institutes and hospitals to further experimental and diagnostic research. 44 The institute structure required team production.
43 Althoff's informational network in the case of the appointment of Behring has been documented by Eckart, op. cit ., 1991, p. 394. 44 This approach was not restricted to medicine, but related to other disciplines as well. The Schmoller program is an example that illustrates the new approach in social research. Jürgen Backhaus, 1989, op. cit. , pp. 48-49. 251
Concerning the first bundle of property rights, all contracts became consolidated into the hands of one contracting agent, the appointed chair holder or institute director, who worked out a clear cut research program. All of the institute's resources served this program. Concerning the second bundle of property rights, we can note that the institute director had the right to claim the residual profit after all expenses have been met, thus ensuring that the residual income would be used for the benefit of the institute. With regard to the third bundle of property rights, we find that the institute director had the right to substantially change the institute structure by virtue of its research program. Both conditions, under which this constellation of property rights will emerge, are met. Under the institute structure, productivity of the team is higher than productivity of the sum of individual team members producing separately. This implies that individual contributions are not separable. The marginal productivity of the individual team members cannot be measured, but as a substitute indicator one can monitor input behavior. Criteria are the specific research procedures and teaching approaches, which follow from the institute's program.
The traditional university structure with loose chair holders still remained important in the era Althoff. Among the loose chair holders, Althoff himself was the central monitor. He pushed for a unification of examination requirements and the harmonization of faculty bylaws, thus improving the quality of research and teaching. The professors belonging to a traditional university faculty had no common research program. By providing information to the individual chair holders, Althoff improved the decision- making process of the faculty. (Jürgen Backhaus, op. cit ., pp. 20, 21). He also tried to become the residual claimant, for instance by capping lecture fees above a certain amount. Professors had the right to collect lecture fees from each student. Althoff set a limit to the amount of lecture fees that professors were allowed to keep. Lecture fees gathered above the limit were to the benefit of the university. This was a measure to lessen the intensity of competition among professors. By raising base salaries and capping lecture fees, while at the same time increasing capacity and making faculties more attractive through outstanding appointments, he transmuted himself (the Ministry of Culture) into a residual claimant.
The characteristics of basic research as a public good loaded with externalities make it difficult to find marketable applications. 45 Despite this difficulty, Althoff was interested in applications of basic research. An illustration is the following case:
Sometimes basic research can be readily applied and the residual may be partly claimed in order to channel funds back into the research activity. The case of Behring is illustrative. Mass production of the diphtheria serum was clearly in the interest of the state, since it clearly affected the health status of the population. Granting the right to mass produce the serum to the Hoechst Corporation created a rent for which the company was willing to fund Behring's research institute. The state took its cut by regulating the national prices for the serum. (Jürgen Backhaus, op. cit ., p. 22).
45 If the academic product is marketable, then residual claimancy can even extend to the tax state, an implication Althoff was aware of. 252
Althoff was a central monitor and residual claimant. In some cases, he established a monopoly, as in the case of serum production at the Hoechst Corporation.
Within the institute structure, he assigned the institute director the role of central monitor and a residual claimant. Within the faculty structure, he was the central monitor and residual claimant himself and set incentives to make better informed decisions.
While property rights analysis leads a long way towards explaining the features of the Althoff System , there are competing theories which lead to additional insights. For instance, Tullock posed the question whether the backwardness of the social sciences is a result of the prevailing social organizations in the social sciences. 46 He held that institutional changes in the organization of academic institutions could improve the quality of research and teaching. For the American environment, Tullock arrived at the result that the multiplicity of methods, as well as controlled experiments, led to an advantage of natural sciences over social sciences. He found that moral and political views held by the profession mattered. As measures to raise the quality of the social sciences, he suggested to create transparency, and to add highly qualified professionals to the faculty, even if they were outsiders. In this light, we can interpret the so-called Lex Arons , (as discussed above) to which not only Virchow, but also Schmoller was opposed. By creating a legislative basis for the lay-off of the physicist, Althoff at least achieved transparency in an undesirable matter, perhaps preventing similar events from happening. 47 We have seen above that he opened the universities to outsiders, for instance to Koch and Ehrlich, who otherwise could not have had a career in the Prussian university system. By these strategies and the introduction of new organizational forms, Althoff created incentive compatible, academic structures.
10.5 Summary and Conclusions
Friedrich Althoff received an honorary PhD from Harvard University for his successful efforts at restructuring the university and teaching landscapes in these parts of Germany, where his influence prevailed. Harvard particularly emphasized his impact on restructuring organizations in which instruction and research takes place. The term Althoff System , interpreted as a set of connected points that work together, proved felicitous in emphasizing that medicine and health policy are two areas that have to be seen as interrelated. Here lies the strength of Althoff's effort in the area of health.
As should be plain from the discussion in this chapter, the Althoff System changed the conditions for science and scholarship and this had implications for the structure of medicine and public health, the focus of this chapter. For instance, Althoff tried to
46 Gordon Tullock. 1966. The Organization of Inquiry . Durham: Duke University Press. 47 Academic freedom had to be protected at the time. Jürgen Backhaus, op. cit ., p. 23. 253
improve the quality of studies by influencing universities' bylaws regulating studies and exams, including dissertations and habilitations. In medicine, this would lead to better physicians and a higher quality of health care provided. Other major efforts towards an improvement in the quality of health care included the foundation of new institutes both within and outside of universities, depending on the requirement of a project. This opened up new lines of research, leading towards unforeseen applications. Diverse sources for funding, both public and private, had to be identified and organized. Althoff tried to find the candidates best suited for a position, independent of other characteristics such as religion. He also offered chairs to Jewish scholars, who otherwise had little chances at traditional universities. Sometimes a professor was named to head an institute even against the wishes of the faculty, as in Behring's case. Hospital foundations and the reorganization of existing hospitals took place. Althoff supported physicians' continuing education. During the era Althoff, progress has been made with respect to administration and legislation. Two major projects pursued by Althoff included the campaign against tuberculosis and the reduction in the mortality of newborns.
The economic theory of property rights of Alchian and Demsetz is used here as a paradigm in order to understand how the Althoff System works. Applying property rights theory, the Althoff System can be interpreted as a systematic effort to transform the right of using the resources within an academic institution, the right to reorganize it and the right to claim residual profits within the institution, in such a way that the switch from individual to team production could be made, thus realizing the benefits of higher productivity of a team compared to separately working individuals.
The essential points in the present chapter have been, first, to show that Althoff improved the informational basis. On this basis, he secondly tried to make the best university or academic appointment and opened the system to the outside by promoting international exchange programs. Third, he ensured academic freedom and diversity of ideas by giving outsiders a chance. Fourth, he used multi-source financing in order to further maverick ideas. In his policies, he combined a rise in the quality of medical education with an improvement of public health.
References
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Backhaus, Jürgen. 1989. "Schmollers Grundriß der Allgemeinen Volkswirtschaftslehre: Ein aktueller Klassiker." In: Jürgen Backhaus, Yuichi Shionoya, Bertram Schefold. Editors. 1989. Gustav von Schmollers Lebenswerk. Eine kritische Analyse aus moderner Sicht. (Gustav von Schmoller: his Life's Work. A Critical Analysis from a Modern Perspective). Düsseldorf: Verlag Wirtschaft und Finanzen, pp. 31- 76.
Backhaus, Jürgen. Guest Editor. 1993. "The Economics of Science Policy: An Analysis 254
of the Althoff System." Journal of Economic Studies . Vol. 20, 4/5.
Backhaus, Jürgen. 1993. "The University as an Economic Institution: The Political Economy of the Althoff System. Backhaus, Jürgen. Guest Editor. "The Economics of Science Policy: An Analysis of the Althoff System." Journal of Economic Studies . Vol. 20, 4/5, pp. 8-29, p. 9.
Backhaus, Jürgen. 1991. "Das System Althoff: Eine ökonomische Analyse." Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das "System Althoff" in historischer Perspektive . Vom Brocke, Bernhard. Editor. Hildesheim: August Lax, pp. 455-464.
"Behring, Emil Adolf." 1923 (2) The New International Encyclopedia . New York: Dodd, Mead and Company. Vol. III, p. 76.
Coase, Ronald H. 1937. "The Nature of the Firm". In: The Firm, The Market and the Law . 1988. University of Chicago Press, Chicago pp. 33-56.
"Ehrlich, Paul." 1923 2. The New International Encyclopaedia . New York: Dodd, Mead and Company. Vol. XYII. p. 548.
Eckart, Wolfgang U. 1991. "Friedrich Althoff und die Medizin." (Friedrich Althoff and Medicine). Vom Brocke, Bernhard. Editor. Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das System Althoff in historischer Perspektive . (History of Science ans Science Policy in the Industrial Age. The Althoff System in Historical Perspective.)
Levy, David M. 1993. "Research and Development." Henderson, David R. Editor. The Fortune Encyclopedia of Economics , pp 78-81.
Mullins, Laurie J. 1993 (3). Management and Organisational Behaviour . Great Britain: Pitman Publishing.
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"Sewage Farming." 1923(2). The New International Encyclopedia . New York: Dodd, Mead and Company. Vol. XX, p. 754.
Senn, Peter. "Where is Althoff? Looking for Friedrich Althoff in English Language Sources." In: Backhaus, Jürgen. Guest Editor. 1993. "The Economics of Science Policy: An Analysis of the Althoff System." Journal of Economic Studies . Vol. 20, 4/5, pp. 201-261, p. 210.
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"Vaccination." 1923 (2). The New International Encyclopedia . New York: Dodd, Mead and Company. Vol. XXII, pp. 841-843.
Vereeck, Lode. 1993. The Economics of Science and Scholarship. An Analysis of the Althoff System . Maastricht: Universitaire Pers Maastricht.
Vereeck, Lode M.C. 2001. Das deutsche Wissenschaftswunder. Eine ökonomische Analyse des Systems Althoff (1882-1907) . (The German Miracle of Science and Scholarship. An Economic Analysis of the Althoff System (1882-1907)). Volkswirtschaftliche Schriften, Vol. 514. Berlin: Duncker & Humblot.
Vierhaus, Rudolf, Vom Brocke, Bernhard. Editors. 1990. Forschung im Spannungsfeld von Politik und Gesellschaft. Geschichte und Struktur der Kaiser-Wilhelm-/Max-Planck- Gesellschaft. Aus Anlaß ihres 75jährigen Bestehens. (Research between Politics and Society. History and Structure of the Kaiser-Wilhelm-/Max-Planck-Gesellschaft ). Stuttgart: Deutsche Verlags-Anstalt.
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Vom Brocke, Bernhard. 1980. "Hochschul- und Wissenschaftspolitik in Preußen und im Deutschen Kaiserreich: Das "System Althoff" (1882-1970)." (University and Science Policy in Prussia and in the German Empire). Peter Baumgart, Editor. Bildungspolitik in Preußen zur Zeit des Kaiserreichs . (Policy of Education in Prussia during the time of the Empire) Stuttgart: Klett-Cotta, pp. 9-118.
Vom Brocke, Bernhard. 1991. Editor. Wissenschaftsgeschichte und Wissenschaftspolitik im Industriezeitalter. Das System Althoff in historischer Perspektive . (History of Science and Science Policy in the Industrial Age. The Althoff System in Historical Perspective.) Lax: Hildesheim.
Vom Brocke, Bernhard. 1991. "Friedrich Althoff (1939-1908), Forschungsstand und Quellenlage, Bemühungen um eine Biographie." (Friedrich Althoff, a Documentation of Research and Sources). In: Vom Brocke, Bernhard. Editor. Lax: Hildesheim, pp. 15-44.
Zeiss, H. und Bieling, R. 1941. Behring. Gestalt und Werk . (Behring. Man and Work). Berlin: Bruno Schultz Verlag.
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Chapter 11
Franz Oppenheimer's (1864-1943)
Social Economic Approach to Health
Contents
11.1 Introduction:
Franz Oppenheimer, the Physician Turned Economist
11.2 The Individual's Circle of Provision
11.3 The Basics of Land Rent Theory
11.4 Summary and Conclusions
259
11.1 Introduction:
Franz Oppenheimer, the Physician Turned Economist
Franz Oppenheimer (1864-1943), the physician who later turned to economics and the social sciences, saw the root of illness and epidemics in poor social and economic circumstances. He identified overcrowding, poor food, exposure to cold and damp, prolonged and exhausting work, and unhealthy occupations as factors lowering the resistance to disease and making people prone to illness and early death. Oppenheimer widened his scope and studied what he called "social illness." 1 He proposed the agricultural cooperatives ( Siedlungsgenossenschaften ) as the basis for a healthy life. While health economics is typically done in terms of looking at the specific health conditions, institutions, and costs, Oppenheimer looked at the social and economic conditions, which gave rise to poor or better health. In this sense, he is a meta health economist.
Franz Oppenheimer was born 1864 in Hanover; the family later moved to Berlin, where his father was a preacher in a Jewish Reformed Community. 2 Oppenheimer became a physician, but as he noted in his autobiography, this was an increasingly frustrating experience. He described that he often was not able to treat tuberculosis patients, despite a method of treatment available, because he was not able to keep them out of an health endangering job for a period long enough so that their health would be completely restored; he often could not help infants, who died, because they received spoilt milk or were kept in overly heated and crowded rental quarters. (1929, op. cit ., p. 77). Oppenheimer realized early in his practice of how important economic, environmental and social circumstances were for people's health.
Oppenheimer practiced medicine for ten years, before he decided rather abruptly to switch the approach, but not the basic preoccupation. While hiking in the Harz Mountains one night, the basic idea of his work struck him like a flash of lightning. The land rent operates like a "lock" on economic development ( Bodensperre ). 3 Any "social
1 Oppenheimer was by no means the first physician to realize that epidemics, illnesses and deaths are related to the environment such as crowding, poverty, and other social causes. As Paracelsus noted himself, there is a strong correlation to the environmental circumstances under which people live and their health state. He proposed to look for the remedy in the immediate environment of a patient. For early quantitative approaches compare Zoltan Kenessey. 1995. "The Emergence of Quantitative Thinking about Mortality and Life Expectancy." International Review of Comparative Public Policy. Vol. 6, pp. 291-311. 2 See the autobiography by Oppenheimer in: Felix Meiner. Editor. 1929. Die Volkswirtschaftslehre der Gegenwart in Selbstdarstellungen. Irving Fisher, Achilles Loria, Franz Oppenheimer, Edwin R. Seligman, Camillo Supino, Leopold von Wiese . (Modern Economics in Portraits). Leipzig: Publisher Felix Meiner. "Franz Oppenheimer," pp. 69-116. 3 Franz Oppenheimer. 1898. Grossgrundeigentum und soziale Frage . (Extended 260
ill" that he diagnosed in society, he ultimately traced back to the "lock" of the land rent. His new area of research became the state sciences, in particular economics and sociology. In 1909, he received in Berlin his habilitation at the behest of Schmoller and Wagner by the faculty of the humanities for both, economics and sociology. He himself used to emphasize that his field was economic and sociological theory . In 1919, he accepted a call to the chair of sociology and economics in Frankfurt. He left the chair in 1929 and went back to Berlin in order to establish his projects of cooperative agricultural settlements. After the National-Socialists came to power, he published in Amsterdam, but did not leave Germany until 1938, when he emigrated via Japan and Shanghai to the United States. Oppenheimer died in Los Angelos in 1943. 4
The experience as a physician left an imprint on Oppenheimer’s work in economics and sociology. In his autobiography, he also mentioned important precursors:
So I came to my real profession with completely clear concepts of the natural sciences, of the structure and functioning of a higher organism in health and illness; and here I found the leading thoughts for my work of life. This becomes even obvious to someone, who is only slightly familiar with my work. The same can be said of the many physicians before me, who became famous in the history of the social sciences: Bernard de Mandeville, François Quesnay, Charles Hall, Thompson, Victor Aimé Huber and others." 5
One of the physicians, who had turned to the social sciences before him, was Bernard de Mandeville (1670-1733). He wondered how people could promote their common interests, if they all acted individually in their own self interest. He found that by acting in the own self interest, people also further the interests of society as a whole. This he illustrated in a poem, "The Grumbling Hive, or Knaves Turn'd Honest," (1695). In the poem, he described a hive of bees that abolished the evils of their society, and then found that the society had vanished with the vices. They had been prosperous while wicked, but poor when they reformed. 6 Mandeville considered self-interest as a vice,
Landholding and the Social Question). Berlin: Deutsches Verlagshaus, p. 7. 4 Volker Caspari. 1999. "Oppenheimer, Franz." Harald Hagemann, Claus-Dieter Krohn. Biographisches Handbuch der deutschsprachigen wirtschaftswissenschaftlichen Emigration nach 1933 . München: K. G. Saur, Vol. 2, pp. 514-517. 5 The original German reads: "... So aber bin ich mit völlig klaren Vorstellungen über die Naturwissenschaften und vor allem über den Aufbau und die Funktion eines höheren Organismus in Gesundheit und Krankheit in meinen eigentlichen Beruf hineingekommen; auch der oberflächlichste Kenner meiner Werke weiß, daß ich hier die leitenden Gedanken meiner Lebensarbeit fand, wie sie vor mir die zahlreichen Ärzte gefunden haben, die in der Geschichte der Gesellschaftswissenschaften Epoche gemacht haben: ein Bernard de Mandeville, ein François Quesnay, ein Charles Hall, ein Thompson, ein Victor Aimé Huber und andere." Oppenheimer, 1929, op. cit ., p. 77. 6 Hayek described Mandeville as a forerunner of the laissez-faire economy, whose work had been read by Adam Smith. Friedrich A. von Hayek. 1966. "Dr. 261
and self-denial as a virtue. He showed that society is based on vices such as pride, self-interest, and the desire for luxury. Thus, vices are at the basis of economic well- being of a society. In 1714, he portrayed a complex society in The Fable of the Bees . Co-operation of individuals occurred unknowingly, because they all acted in their own self-interest; for instance, pursuing the vice of luxury would result in employment opportunities of the poor. On the basis of these thoughts, Mandeville concluded that the economic well-being of society was best achieved, when there was a minimum of government interference, or interference by charitable organizations.
Like Mandeville, Oppenheimer was concerned with the question of how the common best of society could be reached, but he did not think that this should be reached by pursuing vices. Oppenheimer was opposed to Mandeville's social policy recommendations. For instance, Mandeville wanted to keep the working class in a state of dependency. Limited schooling and low wages were among the measures to hold the working class down. Mandeville thought that it was necessary to have a pool of people who were looking for employment. If everyone would pursue the vice of luxury, then there were not enough people, who were willing to work. Oppenheimer opposed this conclusion by Mandeville, but shared with him the lead question and also the dislike for government and charity interference.
Oppenheimer was also influenced by the work of François Quesnay (1694-1774), a surgeon, who was compelled to abandon surgery for medicine because of defective eyesight. In 1749 he became physician to Madame de Pompadour ( i.e. the French King's powerful mistress), and he was appointed physician to the King in 1752. This position offered him free time for philosophical and economic studies. In 1756, he published in the Encyclopédie articles on "Fermiers" and "Grains," in which he analyzed the deficiencies of French agriculture. He advocated the adoption of capitalistic methods in farming and the abolition of the vexatious taxes and restrictions, which were impoverishing French peasants. Quesnay advanced the doctrine that the sole source of national wealth is the surplus of agriculture, the produit net . In 1758 he published his Tableau économique .7 Quesnay is the founder of the School of Physiocracy. Like Quesnay, Oppenheimer focused on the rural sectors of the industrial society, but his approach was different. By proposing the cooperative settlement, or Kibbutz , and thus making farm workers capital-owners, he found an original solution to the Social Question .
In his pamphlet Freiland in Deutschland [ Free Land for Germany ] (1895), 8 and in his major work Die Siedlungsgenossenschaft. [The Cooperative Settlement ] (1896), 9
Bernard Mandeville." Proceedings of the British Academy , 52, pp. 125-141. 7 "Quesnay, François." 1923(2). The New International Encyclopedia . New York: Dodd, Mead and Company, p. 439. 8 Berlin: Fontana. 9 The full title of this work is as follows: Die Siedlungsgenossenschaft. Versuch einer positiven Überwindung des Komunismus durch Lösung des Genossenschaftsproblems und der Agrarfrage . (The Cooperative Settlement. Trying to Overcome Communism in a Positive Way by Solving the Problem of 262
Oppenheimer demanded the abolishment of large landed estates and foundation of cooperative agricultural settlements. He further developed the topic in his other major works Grossgrundeigentum und soziale Frage [ Extended Landholding and the Social Question ] (1898), 10 and Theorie der Reinen und Politischen Ökonomie [ Theory of Pure and Political Economy ] (1919). 11 Oppenheimer is the founder of a system of sociology, System der Soziologie , which appeared in three volumes (1922-1924). 12 He was also a co-founder of the American Journal of Economics and Sociology .
Oppenheimer's analysis of the role of the individual in the family is fundamental to health economics and will be presented in section 11.2. His basic idea of the "lock on land" and consequences for the “health” of society and economy will be discussed in section 11.3. A summary and conclusions follow.
11.2 The Individual's Circle of Provision
In his Theory of the Pure and Political Economy , Oppenheimer distinguished human actions caused by the economic impulse from the more playful ones, which he excluded from economic consideration. (1919 (4), op. cit. , p. 22). According to Oppenheimer, individuals and groups of people are busy with the acquisition and administration of material goods in order to satisfy needs of all kinds, an activity that goes beyond the egoistic self-provision with goods. It also includes the provision with goods of those family members, who are not able to work. The core family not only consists of working members, but also encompasses persons, who are not yet or no longer able to work such as children, the handicapped, the mentally ill, or the chronically ill. (1919 (4), op. cit. , p. 143). Therefore, Oppenheimer argued that the core family cannot form the basic unit in the economic society. Rather, the individual with its circle of provision forms the normal, elementary organ of an economic society. (1919 (4), op. cit. , p. 144). In order to undermine his view, Oppenheimer gave the example of an isolated individual, which could not be the basic unit of society, because men are not able to survive in an isolated state. A baby cannot feed itself and an isolated human being cannot be reproductive. (1919 (4), op. cit. , p. 5). Hence, the family is the collective organism of the smallest size, but the relevant unit of decision-making is that individual family member, which carries responsibility for others.
Like Schäffle, Oppenheimer used analogies to the human body in order to explain social and economic phenomena, but he thought that Schäffle carried the analogies too far. 13 Oppenheimer identified as the fundamental difference between individuals and
Cooperatives and the Agricultural Question). Berlin: Vigh, Deutsches Verlagshaus. 10 Berlin: Vita. 11 Berlin: Georg Reimer. 12 (1) 1922/23, (2) 1926, (3) 1923/24: Jena: Gustav Fischer. 13 By comparing the body of men to the body of society, Schäffle developed a thoroughly sociological system. He continued the old tradition of "body politic," 263
society the life-cycle, to which individuals are subject to, but society is not. According to Oppenheimer, illness and death are related to an individual's ability to adjust. In the case of an older person, the ability to adjust to outer changes approaches zero. A person becomes ill and eventually dies, if the outer changes are too strong to cope with, for instance, caused by a trauma such as an injury from falling, getting hurt in an accident, by a vicious infectious disease, or by an unhealthy way of life. 14 While individuals are subjected to a life-cycle, society is not, and can thus not be compared to a functioning organism. Herein, Oppenheimer saw the limits of using analogies to the human body in order to explain economic and sociological phenomena. While individual lives end with death, society renews itself and is virtually immortal. Oppenheimer tried to explain the forces that shape the social process, an approach he called the theory of organicism . He is the founder of a system of sociology, which has been published in three volumes. 15
It can be noted that Oppenheimer's treatment of the core family might have reflected the social reality of his time, but he did not investigate the economic consequences of support relationships. It was, for instance, not uncommon that children, providing support to their elderly parents in the case of failing health, in exchange took over the family property at no price or at a reduced price. Did this make the parents entirely dependent on the children? The parents' economic and social status might remain high, despite the support they receive from their children. Oppenheimer’s treatment of the difference between the individual and society also remains superficial, because not only individuals are subject to a life-cycle, but societies can be abolished as well. In what follows, attention will not be paid to his extensive sociological contributions, but to his economic work, in particular with respect to health.
11.3 The Basics of Land Rent Theory
In investigating the Social Question , Oppenheimer saw poverty in rural areas and the labor question of the cities as related to each other. As a physician, he looked for the leading cause in order to explain rural poverty, low wages of the workers in the cities, economic misery, and unhealthy conditions such as moral and hygienic squalor. These
which presumed that the harmony of the body was reflected in the harmony of society. Albert Schäffle. Bau und Leben des Socialen Körpers . (Organization and Working of the Social Body.) 1875 -1878. Four volumes. Tübingen: Laupp'sche Buchhandlung. The contribution by Schäffle has been discussed by Sophus Reinert, "Darwin and the Body Politic: Schäffle, Veblen, and the Biological Metaphor Shift in Economics." Paper presented at the 16th Heilbronn Symposion in Economics and Social Sciences on Albert Schäffle (1831-1903) , June 19-22, 2003. 14 Franz Oppenheimer. 1898. Grossgrundeigentum und soziale Frage. (Landed Estates and the Social Question). Berlin: Deutsches Verlagshaus, p. 6. 15 Franz Oppenheimer. System der Soziologie . (System of Sociology). Volume 1, Jena 1922/23, Volume 2, Jena 1926, Volume 3, Jena 1923/24: Gustav Fischer. 264
factors are associated with illness and a high mortality among the population. He found that the dominant cause consisted in the ownership of large properties of land. (1898, op. cit. ). Oppenheimer coined the term "Bodensperre" (lock on land) in order to illustrate the impossibility for the workers to get access to the land. He considered it a shortcoming in Adam Smith' exchange economy that the ownership of the land did not play a major role, a "phenomenon of law," which he polemically called "bastard of law," or "expression of the law of violence" (Oppenheimer, 1898, op. cit. , p. 94). He held that the ownership of the land in the hands of a few large property owners was a major factor in maintaining an unequal distribution of wealth and notably life chances. His reasoning was as follows:
In his Theory of Pure and Political Economy , Oppenheimer distinguished between an economy before and after accumulation of wealth. He inquired whether the unequal accumulation of wealth was due to individual differences. Individuals differ according to skills and levels of energy so that they are distinguished in their ability to perform, and they differ in temper and character as well. (Oppenheimer, 1898, op. cit. , p. 93). Over time, however, Oppenheimer has found that the wealth of the individuals has not increased according to their productivity or other individual characteristics. 16 Therefore, he continued to inquire into other causes.
Oppenheimer identified a more fundamental source responsible for the unevenness of distribution of goods than existing individual differences, namely differences in the land rents between the cities and rural areas. On the basis of Dühring's theory, Oppenheimer formulated an answer to the question, how an uneven distribution in land could come into existence. 17 He went far back into cultural history in order to explain differences in wealth. When nomads started to have herds of cattle, men captured in wars became valuable as a force of labor, and therefore did not get killed when being captured, but lost their freedom. They became slaves of the nomads, who now could afford to have larger herds, for which they needed more land. Wealth increased predominantly around the property of the already existing owners of herds, thus creating the beginning of wealth differences. (Oppenheimer, 1898, op. cit. , p. 26).
Oppenheimer described another historic example of slavery in order to show that the concern for health and life of slaves depended on economic considerations. Slave owners in North America were concerned about the deaths of the slaves, because it affected the profitability of slave investments. Death rates reflected, and were in part determined by, such factors as diet, physical treatment, hard labor, and the quality of medical care and housing. All these factors were under the control of the slave owners. Oppenheimer showed that at the time, when the price of the slaves was low due to the high quantity of slaves supplied, the slaves were forced to hard labor and a high death rate resulted (1919 (4), op. cit. , p. 404). In times, when the price of the slaves was high due to a limited supply, the owners of the slaves would treat them better, which was
16 Franz Oppenheimer. 1921. "Gustav Schmollers `Soziale Frage'." Technik und Wirtschaft . Berlin: Verlag des Vereines deutscher Ingenieure. 17 Eugen Dühring. 1871. Kritische Geschichte der Nationalökonomie und des Socialismus . (A Critical History of Economics and Socialism). Berlin: T. Grieben. 265
reflected in a lower death rate. (1919 (4), op. cit. , p. 405).
Similarly, the freedom of the fiefs in the feudal proto capitalist economy was restricted. Oppenheimer studied the economic, social, and legal constraints of the fiefs. Since they are tied to the land, they cannot seek alternate, more productive employment and therefore have a low value, not even a market price as a slave does. Accordingly, their treatment is often marked by neglect. Their status of fiefs prevents them from entering the labor market. Due to this market restriction, exclusion from the labor market, poverty hit rural areas first, long before it appeared as a problem in the cities. The structure of feudal land ownership works like a "lock" on economic development, because the land cannot freely change hands. The fiefs are tied to the land and so they are tied to the "lock." They cannot leave the land, nor have access to their own. Their reproductive behavior reflects the lack in outlook. The rate of birth was high among the fiefs, but the rate of infant mortality was also high, so that the rate of reproduction was below that of the current generation. When capitalism emerged, it gave the fiefs, who had not been able to choose in virtually any area of their own life, freedom by moving to the cities.
The emergence of capitalism had effects on the land rents. In the large cities where industrialization started, the land rents were very high. The result was that industrial workers had to live in crowded quarters under unhealthy living conditions. Despite this situation, Oppenheimer has argued that for workers living in poverty in rural areas, the move to the large cities, where they become part of the reservoir of unskilled industrial workers, would still be an improvement. They gain freedom and face at least a slight chance to get ahead. By competing with each other for work, workers are pressing the wages down. The consequences are decreasing prices in general, which have a repercussion on the industrial worker class. As prices decrease, entrepreneurs increase production by hiring more workers.
Oppenheimer's diagnosis is that of an "ill economy;" 18 more workers are attracted to the cities at ever lower wages. In this situation, poverty, illness, and a very low standard of life characterize the industrial worker class. In an effort to survive, the workers turn to beggary, criminal behavior, and prostitution. They not only lose their inner moral standards, but social and legal regulations also fail to protect them. (Oppenheimer, 1896, op. cit. , Cooperative Settlement , pp. 608). Oppenheimer used the term "phenomena of social illnesses" (soziale Krankheitserscheinungen) to refer to the plight of the large cities.
Capitalism has freed the fiefs by giving them the freedom to move to the city. Oppenheimer argued that for the fiefs, this meant a social improvement, despite the fact that they added to the large number of the poor living in the cities. 19 In material respect, however, the industrial worker might be in a condition that is worse than that of
18 Franz Oppenheimer. 1898. Grossgrundeigentum und soziale Frage . (Large Property Ownership and Social Question ). Berlin: Vita, p. 165. 19 This is in contrast to Marx, who saw the dominant reason of the plight of the industrial workers in capitalism and its inherent contradictions. 266
a farmhand. Oppenheimer described this as a tradeoff. An industrial worker generally receives less to eat than a farmhand, but enjoys more social freedom, more social interaction with other people of his class, and there is a chance, even if it is only small, that by luck and diligence he will move up into the class of entrepreneurs. (Oppenheimer. 1898. op. cit ., pp. 165, 166).
With a better industrial development, participation in world trade becomes feasible. Due to an increasing exposure to world trade, crises occur. Crises have an effect on land rents in both, the city and rural areas. In the large industrialized cities, the process described above would only push those proletarians into poverty, who are ill and weak, but the young and healthy workers could reach a certain standard of living. However, ever recurring crises ruin even the young and healthy industrial workers in economic, physical, and moral respect. (Oppenheimer, 1898, op. cit. , p. 166.)
Oppenheimer saw crises as the main root of the high rate of mortality among workers and their families. Crises push men and women into crime and mass prostitution, they are the cause of mental disorders and even lead to the degeneration of entire nations. In a situation were crises prevail, the industrial workers' class faces no exit. Forces of pressure and counter pressure are at work on both, the industrial workers' and the capitalist employers' class. For instance, pressure within is felt by industrial workers as a force to form coalitions in order to defend their common interests, while counter pressure by workers leads to revolts and strikes.
In rural areas, the consequences of recurring crises are severe, too. The owners of the large estates are less well able to sell their agricultural products at the market and are likely to suffer financial losses. This leads to a decrease of the land rents. Due to a reduced demand, a reduction of the prices of land is likely to follow and, eventually, impoverishment of the estate owners. This worsens the situation of the fiefs, who will keep moving from rural areas to the cities.
Oppenheimer argued that in a situation of crises prevailing, the industrial worker question can only be solved by addressing rural conditions. (Oppenheimer. 1898. op. cit. , p. 168). He considered it as difficult and even impossible to improve the situation of the unqualified workers in the cities, as long as men keep moving from the country to the cities and therefore proposed to solve the Social Question by setting up cooperative agricultural settlements. (Oppenheimer. 1896, op. cit. ). This would create a labor market in rural areas, which had not been available to the fiefs. Oppenheimer saw the feasibility of this solution, because of the developments in the land rents. Recurring crises bring down the land rents in rural areas and lead to under populated areas.
The "lock" on land in the hands of a few estate owners vanishes, making it possible to buy land and develop an alternative method of production. Oppenheimer designed a scheme to buy out defaulted large agricultural rural estates and turn them into small agro-industrial farms. Single individuals would not have the capital to buy the land and machinery necessary to start an agricultural operation. By forming cooperatives (Siedlungsgenossenschaften ), agricultural settlements could be established. Oppenheimer suggested that workers took their unemployment insurance claims as 267
down payments to acquire the land and that credit unions would be established in order to provide credit for further investments. He wanted to turn the agricultural settlements into small agro-industrial firms, which would provide in basic needs and where workers could engage in a specialization or learn a skill that was marketable. 20 While cooperative agricultural settlements offer a healthy environment to work and live in, they can only be the starting point of a development that will end in the formation of many small cities with a large agricultural background. Oppenheimer entertained the vision of garden cities forming in the future with many small centers, instead of centralized urban areas. 21
Over time, cooperative agricultural settlements face incentive problems. (1896, op. cit. ) What starts out as a cooperative - since the new landowners have no credit lines and no own capital and hence have to share machinery bought on credit from the cooperative settlement bank - over a generation or two assumes the character of a joint stock company. The capital accounts of the members of the cooperative do necessarily diverge over time with their different life profiles. Some members keep reinvesting, some old members are replaced by new members. The principle of "one member - one vote" cannot be sustained with that diverging capital ownership. The work related share and the capital related share diverge. Some members of the cooperative retire and sell their capital shares to others, originally only to fellow cooperators, but later also to people outside. The market widens, step by step the cooperative turns into a hybrid cooperative/joint stock corporation. Slowly, the cooperative transforms into a joint stock company. Although Oppenheimer saw this development, which he called the "law of transformation," he nevertheless felt that the cooperative was a necessary step to "unlock" the land and thereby the fates of the workers and move them into a free capitalist society. 22
11.4 Summary and Conclusions
Oppenheimer's approach goes beyond the scope of modern health economics. He was thoroughly interested in finding the roots of "social" illness, a cluster of illness, pauperism, crime and prostitution, and found them in the "lock" of land ( Bodensperre ). In rural areas, the "lock" of land prevented workers from acquiring and farming their
20 In this same way, he also saw the Kibbutz , which are cooperatives for consumption and cooperatives for production at the same time, as a transitory stage for a free, capitalist Israel. Oppenheimer went to Israel in order to promote the Kibbutzim movement as a natural extension of the cooperatives (Siedlungsgenossenschaften ) he had propagated in Germany. 21 This was a popular vision at the time. Health reasons were the the main concern to establish garden cities. Compare, e.g. , Karl Ballod, 1920. Der Zukunftsstaat. Produktion und Konsum im Sozialstaat. (The State of the Future). Stuttgart: Dietz, pp. 57–61. 22 Oppenheimer was Ludwig Erhard's teacher. Ludwig Erhard popularized the term "freie Marktwirtschaft." 268
own land, so that workers kept moving to the cities. In the cities, crowded living conditions for a large part of the industrial workers' population led to illness and deterioration of moral standards. Being a physician turned economist, one can interpret Oppenheimer's contributions as that of a meta health economist, who diagnosed the causes of the Social Question and prescribed agricultural cooperatives (Siedlungsgenossenschaften ) as a remedy. Judged by the standards of his time, this was a sensible solution.
In studying the beginnings of the inequality of wealth among men, Oppenheimer found that the treatment of nomads and slaves improved when they became valuable as a work force. He described that the fiefs during the proto-capitalist period had no alternative of employment due to the lack of a labor market in rural areas. Their poverty and low standard of living were reflected in high child mortality. The root of their plight was that they had no access to the land, because the land was divided among large agricultural estates, the so-called "lock on land."
The emergence of capitalism freed the fiefs. They could achieve a social improvement by moving to the large industrial cities. In the cities, where high land rents prevailed, they had to live under crowded conditions. The masses of the workers suffered from what Oppenheimer called "social illness." By competing with each other, they pressed the wages down and prices fell accordingly. The effect of recurring crises was, however, that even the young and healthy workers would face unemployment, followed by a decline in moral standards and pauperism.
Crises, for instance due to world market exposure, not only affected the industrial sectors, but also rural areas. It became more difficult for the large agricultural estate owners to sell their products. Their difficult economic position led to a fall in the land rent in rural areas. As a consequence, agricultural land becomes available. Oppenheimer proposed to set up agricultural cooperatives (Siedlungsgenossenschaften ), which could buy and farm the land. He was trying to create an agricultural base for industry, thereby enhancing a trend towards a dramatic increase in agricultural labor-productivity, which was later indeed to materialize. According to the "Law of Transformation," the agricultural cooperatives would turn into joint stock companies over time.
Oppenheimer remained skeptical about the ability of markets to solve the Labor Question and proposed to establish agricultural cooperatives. As a conclusion, it can be noted that in a time of cost-containment in health care, cooperative solutions should not be overlooked.
269
References
Backhaus, Jürgen G. 1999. "Land Rents and Ecological Crisis: The Case of the Oder River Valley." The American Journal of Economics and Sociology . Vol 58., No. 2, pp. 193-196.
Ballod, Karl. 1920. Der Zukunftsstaat. Produktion und Konsum im Sozialstaat . (The State of the Future). Stuttgart: Dietz.
Caspari, Volker. 1999. "Oppenheimer, Franz." Harald Hagemann, Claus-Dieter Krohn. Biographisches Handbuch der deutschsprachigen wirtschaftswissenschaftlichen Emigration nach 1933 . (Biographical Handbook of German speaking Economists Emigrating after 1933). München: K. G. Saur, Vol. 2, pp. 514-517.
Dühring, Eugen. 1871. Kritische Geschichte der Nationalökonomie und des Socialismus . (A Critical History of Economics and Socialism). Berlin: T. Grieben.
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Lexis, W. 1903. "F. Oppenheimer: Das Bevölkerungsgesetz des T. R. Malthus und der neueren Nationalökonomen. Darstellung und Kritik." (Malthus Law of Population). Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich . Vol. 3, p. 342.
Mandeville, Bernard. 1795. "The Grumbling Hive, or Knaves Turn'd Honest."
Mandeville, Bernard. 1714. The Fable of the Bees: or, Private Vices, Publick Benefits .
Oppenheimer, Franz. 1895. Freiland in Deutschland . (Free Land for Germany). Berlin: Fontana.
Oppenheimer, Franz. 1896. Die Siedlungsgenossenschaft. Versuch einer positiven Überwindung des Kommunismus durch Lösung des Genossenschaftsproblems und der Agrarfrage . (The Cooperative Settlement. Trying to Overcome Communism in a Positive Way by Solving the Problem of Cooperatives and the Agricultural Question). Berlin: Vigh, Deutsches Verlagshaus.
Oppenheimer, Franz. 1898. Grossgrundeigentum und soziale Frage . (Extended Landholding and the Social Question). Berlin: Vita.
Oppenheimer, Franz. 1919. Theorie der Reinen und Politischen Ökonomie . (The 270
Theory of Pure and Political Economy). Berlin: Georg Reimer
Oppenheimer, Franz. 1921. "Gustav Schmollers `Soziale Frage'." Technik und Wirtschaft . Berlin: Verlag des Vereines deutscher Ingenieure.
Oppenheimer, Franz. System der Soziologie. (System of Sociology). Volume 1, Jena 1922/23, Volume 2, Jena 1926, Volume 3, Jena 1923/24: Gustav Fischer.
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Oppenheimer, Franz. 1929. "Franz Oppenheimer." Meiner, Felix. Editor. Die Volkswirtschaftslehre der Gegenwart in Selbstdarstellungen. Irving Fisher, Achilles Loria, Franz Oppenheimer, Edwin R. Seligman, Camillo Supino, Leopold von Wiese . (Modern Economics in Portraits). Leipzig: Verlag von Felix Meiner, pp. 69-116. Rather, LLeland J. 1995. "Virchow, Rudolf Ludwig Karl." In: Collier's Encyclopedia . New York: Collier's, p. 152.
Reinert, Sophus. 2003. "Darwin and the Body Politic: Schäffle, Veblen, and the Biological Metaphor Shift in Economics." Paper presented at the 16th Heilbronn Symposion in Economics and Social Sciences on Albert Schäffle (1831-1903) , June 19-22, 2003.
Schäffle, Albert. 1875 -1878. Bau und Leben des Socialen Körpers . (Organization and Working of the Social Body.) Four volumes. Tübingen: Laupp'sche Buchhandlung.
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Chapter 12
Joseph Schumpeter's (1883-1950) Broader Picture and Health Issues
Contents
12.1 Introduction
12.2 Samples from the Seventh Chapter
12.3 Schumpeter on Health: many "Filiations"
12.4 Summary and Conclusions
273
12.1 Introduction
Can one and the same theory explain both, economic development on the one hand and societal consequences of economic development on the other? Joseph A. Schumpeter (1883 - 1950) provided an answer to this question in the seventh chapter, "The Economy as a Whole," of Theorie der wirtschaftlichen Entwicklung [The Theory of Economic Development] , published in 1912. 1 He entertained the vision that innovation takes place in institutions and organizational structures, and because of the interrelationships between the different sectors not only affects the entire economy, but promotes the evolution of society as a whole. The key concept of his theory is "the entrepreneur," that is the agent, who has the capability to innovate and is willing to face and accept the possibility of failure. He was also interested in how sectors other than the economy proper provide a fertile "playground" for entrepreneurial talent that can end up in economic affairs.
Schumpeter tried to cover the interrelationships between the different sectors of the economy as the entrepreneurial initiative, not only the successful, but also the failed innovations, reverberate through all the sectors. Health issues are an example of phenomena which belong to all sectors at the same time. For this reason we see Schumpeter as an economist whose writings on economic, institutional and social development are relevant for health economics. We conceive of the discipline not as narrow, but as a broader social science based enterprise in scholarship.
In the introduction, a brief look at Schumpeter's life and work follows. In the next section, samples from the seventh chapter illustrate Schumpeter's approach to economic development. This approach has many so-called "filiations," an expression coined by Schumpeter himself. 2 Filiations to health will be discussed in section 12.3. A summary and conclusions follow in section 12.4.
It can only be speculated, why Schumpeter dropped the seventh chapter in the second edition of The Theory of Economic Development (1926). A hint can be found when looking at his biography. Born in 1883 in Triesch (Moravia) to parents who owned a textile factory, Schumpeter was familiar with that business environment when he studied law and economics at the University of Vienna. 3 In 1906, he received his PhD in Law from the University of Vienna, and in 1908 the habilitation
1 Leipzig: Duncker & Humblot. This part of his work appears only in the first edition and has been omitted from later editions, as well as the 1934 English translation. 2 Joseph A. Schumpeter. 1954. History of Economic Analysis . New York. Oxford University Press, p. 6. 3 See, for instance, Jürgen Backhaus. 1999. "Schumpeter, Joseph Alois." Harald Hagemann and Claus-Dieter Krohn. Biographisches Handbuch der deutschsprachigen wirtschaftswissenschaftlichen Emigration nach 1933 . (Biographical Handbook of German speaking Economists Emigrating after 1933), pp. 639-642, p. 640. 274
followed. On the basis of his habilitation thesis, he wrote Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie [The Essence and Principal Contents of Economic Theory] , (1908). For a short period of time, Schumpeter worked as a lawyer and investment banker in Kairo. In 1909, he received a call for the chair in Czernovitz and one year later, he accepted a call as a professor of economics at the University of Graz. In 1913, he became an exchange professor at Columbia University in New York. The publication of two major works fell in that time period, The Theory of Economic Development (1912, op. cit .), consisting of seven chapters, and Epochen der Dogmen- und Methodengeschichte [Economic Doctrine and Method: An Historical Sketch] , (1914). 4
In 1919, Schumpeter served as a minister of finance in the socialist post-war government of Austria, but was dismissed in the same year. Thereafter, he became the chairman of a bank, but the crash of 1924 wiped him out financially and he was dismissed from his position as chairman of the bank. The motivation of Schumpeter's political and entrepreneurial activities, as well as the experience of World War I found its theoretical expression in several publications, the most important one being entitled Die Krise des Steuerstaates [the Crisis of the Tax State] published in 1918. 5 In 1925, Schumpeter accepted a call to the University of Bonn as a professor of public finance where he also taught economic theory. In 1926, when the second German edition of his 1912 book was published, Schumpeter dropped the seventh chapter. 6 When he was offered a professorship at Harvard University, he emigrated to the United States in 1931. Schumpeter remained at Harvard until 1949, teaching the main course in economic theory. In 1948, he became president of the American Economic Association. In 1950, he died in Taconic (Connecticut).
In the preface to the second German edition of The Theory of Economic Development (1926, op. cit. ), Schumpeter himself gave a hint why he dropped the seventh chapter. He made the reader aware of a change in the character of his work. At Harvard University, this change in the character of his work became quite obvious. In his writings in the English language he only published what belonged to the core of the theory. 7
This change in method occurred well before he emigrated to the United States in 1931. To Schumpeter, the criticism of his teacher Eugen von Böhm-Bawerk was an
4 Max Weber. Editor. Grundrisse der Sozialökonomik. I. Abteilung: Wirtschaft und Wirtschaftswissenschaft . Tübingen: J. C. B. Mohr (Paul Siebeck). 5 Graz and Leipzig: Leuschner & Lubensky. 6 The decision followed after his experience of a finance minister and bank chairman which presumably made him much more cautious. John A. Mathews. 2002. "Introduction: Schumpeter's "lost" Seventh Chapter." Industry and Innovation . Vol. 9, nrs. 1/2, pp. 1-5, see in particular p. 2. 7 In his History of Economic Analysis (op. cit.) , published posthumously in 1954, Schumpeter did not include interdisciplinary works. Studies of the Historical School have also been omitted, but this could have to do with the fact that the work was unfinished. 275
important factor for dropping the seventh chapter. Böhm-Bawerk emphasized the need for economic theory to be based on empirical research in the way that both theory and research reinforce each other. 8 In this process of refinement, theories have to be improved in order to lead to a better understanding of empirical facts, while at the same time, the systematic discovery of relevant empirical facts leads to better theories.
In the case of the seventh chapter, Schumpeter felt that the readers were distracted from the underlying economic theory and concentrated their attention on those aspects of cultural sociology, which are also contained in the chapter. He was afraid that readers perceived the seventh chapter as an alternative to economic theory. In addition, he did not want to be associated with those economists, who were opposed to theorizing. For these three reasons, Schumpeter dropped the far-reaching chapter, but later, he returned to the topic. In his seminar on Pareto at Harvard, as well as in his book Capitalism, Socialism, and Democracy (1942), he made a new effort to formulate a unifying theory of development containing cultural and sociological elements. 9 It can, however, reasonably be argued that other authors have better reached the goal of formulating a unifying theory than Schumpeter himself. 10 Sombart or Pareto went beyond the confines of economic theory proper and therefore had a better framework for explaining what Schumpeter is insisting on explaining within - al is it a rather broad - economic paradigm.
12.2 Samples from the Seventh Chapter
In the seventh chapter, Schumpeter drew a rather broad picture. His goal was to formulate one single theory that explains both, economic development and its societal consequences. The arts, politics, the social and other related sciences should be covered by this unifying single theory. As expressed by the subtitle, hypothesis non fingo , he followed the deductive method. 11 The seventh chapter is
8 Eugen von Böhm-Bawerk referred to this process of refinement as Tatsachenforschung . Jürgen Backhaus. 2002. "`The Economy as a Whole': The Seventh Chapter of Schumpeter's The Theory of Economic Development . Presentation." Industry and Innovation . Vol. 9, nrs. 1/2, pp. 91-92, p. 91. 9 New York: Harper. 10 Jürgen Backhaus, 2002, op. cit. , p. 92, and Jürgen Backhaus. 1979. "Pareto on Public Choice." Public Choice . Vol. 33, I, pp. 5-17. 11 The subtitle was taken from Isaac Newton's Principia Mathematica (1713). "Newton's often-quoted dictum hypothesis non fingo (`I do not make fictitious assumptions') was intended to exclude any speculations concerning the causes of the mutual `attractions' of cosmic masses." Karl Pribram. 1983. A History of Economic Reasoning. Baltimore and London: The Johns Hopkins University Press, p. 56. For a discussion of Schumpeter's intention, who dropped the subtitle in the second edition, compare Yuichi Shionoya. 1997. Schumpeter and the Idea of Social Science . Cambridge: Cambridge University Press, p. 164. 276
more than a summary of the first six chapters of his book The Theory of Economic Development (1912, op. cit. ). He compared his own theory of development with those of the classical authors, but in contrast to the first six chapters, the focus is on cultural and sociological aspects in order to explain the entire life of a country. 12 The following samples from the seventh chapter refer to Schumpeter's criticism of the classical theory of development and to the alternative process of development he devised on this basis. Schumpeter envisioned the entrepreneur as the driving factor of development. In the seventh chapter, he is concerned with the repercussions that occur in all the different sectors in the economy. These repercussions, among other effects, can bring about the downward movements that typically accompany development.
The point of departure is a discussion of the classical, static theory of development. Static theory found that changes in the equilibrium were caused by outside factors, but did not provide a coherent theoretical explanation for the movement from one equilibrium to the other. Schumpeter distinguished between static theory leading to adaptation on the one hand and dynamic development on the other. The question of static theory was: "How, based on its entire circumstances of life, does a population reach a particular level of the economy?" In addition, he addressed dynamic development by asking: "How does any economy make the transition from one level to another level?" (2001, op. cit. , p. 94). He compared dynamic development to waves that do not oscillate around a given level, but where a transition takes place from one level to another. The transition from one level to the next is caused by innovations, carried out by entrepreneurs, who have the vision and courage to try out and push through new combinations, for example in the form of new products, new methods of production, or new types of organization.
According to Schumpeter, static activity itself changes the data of the economy; this was a characteristic of development, which has been overlooked by the classical theory. Schumpeter distinguished between the following changes in data: an increase in population; an increase of capital; progress in the method of production as well as in the economic organization of the industrial society; and development of needs. While Schumpeter considered the theory of the classics as commensurate with his own point of view, he did not think that the classics really explained the core of economic development. They rather remained on the surface or looked only at partial effects. This can be illustrated by the example of the consequences of a population increase, which is one of the examples of data changes mentioned above: 13
12 Wolfgang F. Stolper, 1988. "Schumpeters Theorie der wirtschaftlichen Entwicklung - Eine kritische Exegese." (Schumpeters Theory of Economic Development - A Critical Interpretation). Recktenwald, Horst Claus, Scherer, Frederic M., Stolper, Wolfgang F. Eds. Über Schumpeters "Theorie der wirtschaftlichen Entwicklung." Düsseldorf: Verlag Wirtschaft und Finanzen GmbH, pp. 35-74, compare p. 68. 13 Since the seventh chapter is not generally available in English, I am quoting from my own translation. 277
In fact, there is hardly an economist who would not think of the increase of the population as a lever of economic progress. This is always the first issue to be identified when looking for the causes of economic development. It can be observed in the scientific literature as well as in popular discussions of daily questions. What is our response to this kind of argument? In particular one has to clarify the chain of effects consequent to a population increase. The first effect is a rise in the demand for luxury goods and a rise in labor supply. Within the economy, the influence of an increase in population can have no other consequences than those. The rise of the labor force brings about an increase in an original factor of production. This factor of production thereby becomes cheaper to the businessman. At the same time, it permits a higher level of production of goods in the wider economy. Even if the wage were to fall to unprecedented low levels due to an increase in labor supply, the total sum of wages generally will rise. Hence, there is no doubt about it that an increase in demand will ensue. Of course, the situation of the labor class could get worse. Therefore, the economic result achieved by an increase in population could be ambiguous. Nevertheless [476] one could still speak of economic development. The appearance of the economy has changed. In this, we try to make neither a judgment nor an evaluation of the progress. 14 Now, it is important to know how the increase in labor supply will be allocated. Provided that the only change taking place is an increase in population and nothing else varies, and the supply of labor grows, then nothing much will change in the basic lines of the economic system of value. The additional supply of labor will be used for those purposes which have already been served by the existing supply of labor, and for those marginally less productive functions immediately adjacent to the present use. On the whole, the same static value system will be kept intact, except that those economic agents who can take advantage of the lower prices of labor will experience a higher degree of satisfaction of wants. This chain of events has already been analyzed in detail by the classics. In principle, it has been described correctly. The prices of products based mainly on labor will decrease. On the other hand, land rent will rise because the new laborers will demand more products from the same supply of land. In addition, other people will also be in need of more land, for instance, all those industrialists who are expanding their firms. The classics only thought of these effects both centering on the land rent increase. The evidence that the classics only thought of these effects and not others lies in the fact that they - and foremost Malthus, of course, - only saw the negative consequences of population increase over and beyond a certain level. And they were justified within the terms of their model, because if there were really no other effects than the ones described, then it would not take long before a dull pressure of the masses of workers builds up against the
14 It is well-known that within the reach of Malthus' influence the pessimistic concept is predominant. But even from the point of view of Malthus one should admit that the movement of the population is a driving force of development, even if this force could possibly lead to poverty and devastation. 278
prevailing organization of production. [477] By a decrease in the wage and an increase in the prices of foodstuffs the situation of the workers would get worse in two ways: on the one hand this scenario would doubtlessly lead to the consequences as described by Malthus. And on the other hand, it is also beyond doubt that only the landowners would realize a substantial improvement in their situation.
But something else can happen, too. The increase in population can be an incentive to reshape the economy, and this new form of the economy could lead to an improvement for the increased number of people in comparison with the lower level enjoyed by the former smaller number. This is exactly what we observe in reality. Therefore, one has to refer to yet an additional group of effects. The fact that the classics restrict themselves to the consideration of the first group of effects shows better than anything else that they restrict themselves to static considerations. They did not imagine that there could be an alternative concept to the static economy. But then it becomes clear that other effects can occur only, if the economy is not simply passively adjusting to the increase in population; if it does not only behave in a static way, but if it responds actively. In other words, if a development in our sense comes forth. Nothing else shows better that our theory is finally based on and is a refinement of that of the classics. In order for this other group of effects to appear, the economy has to take on new forms. These effects do not automatically happen, but have to be caused by the mechanism described above. 15 Due to the wage decrease, the entrepreneur may find it easier to undertake some particular tasks and, hence, he might undertake reorganizations. If not, if no such creative activity exists, then nothing else happens indeed but that dull pressure on the entire economy. This is yet another example that illustrates the fruitfulness of our distinction between static and dynamic [478] economic activities.
Schumpeter considered the reasoning by Malthus as one-sided that an increase in population through a chain of reactions in the end will lead to a shortage in food. According to the economic classics such as Malthus (1803), the health states and mortality of a population strongly depend on economic conditions. 16 Malthus'
15 Schumpeter here refers to the mechanism of entrepreneurial activity, described in chapters 2 - 6. 16 Thomas Robert Malthus, 1803. An Essay on the Principles of Population. New edition by Patricia James for the Royal Economic Society. 1992. Cambridge: Cambridge University Press. In his essay, first published in 1798, Malthus proposed a basic description between population growth and income leading to the so-called Malthusian trap . "According to Malthus, when population size is small, the standard of living will be high, and population will grow as a natural result of passion between the sexes. When population size is large, the standard of living will be low, and population will be reduced by either the "preventive check" (intentional reduction of fertility) or by the "positive check" (malnutrition, disease, and famine). 279
prediction was that population growth would come to a halt, either intentionally, or due to the rise of poverty leading to malnutrition, bad health, and high mortality. In contrast to this view, Schumpeter held that an increase in population can lead to less poverty and better health if "something else" happens. Repercussions on population growth could take place, but they require the creative activity of an entrepreneur. 17 According to Schumpeter, the classics arrived at their one-sided conclusions, because they focused on static analysis and did not take dynamic considerations into account.
Schumpeter agreed with Marx who held that "capitalism stamped populations out of the ground." 18 He stated that a particular increase in population would have been much smaller, if the economic space for new people had not been created before. Similarly, he considered innovations rather a consequence of economic development than its cause. In the same way, he thought that not the satisfaction of needs would cause new needs, but that development itself causes new needs by way of rising expectations. Consequently, in a dynamic setting equilibrium cannot be achieved, and if an equilibrium is achieved anyway, then it has to be seen as a force against dynamic development and can only be of a short-term nature. Long run development then consists of a string of consecutive partial shorter periods of development. Therefore, economic policy plans can only be made in the short term. 19
According to Schumpeter, the larger, secular movements cannot be determined economically. [492] One has to look at other factors such as social and cultural aspects in order to describe development in the long run. Here, a concept becomes important that lies very much in the cultural and social sphere of the economy, that of the entrepreneur. Schumpeter distinguished between entrepreneurs and other agents. Those agents, whose behavior can be regulated and who will prosper under regulation, "differ substantially" from the entrepreneurs, whom he saw as the motor of economic development.
[469] This [Seventh chapter] is an attempt to present a theoretical analysis of
The Malthusian model implies that, in the absence of changes in technology or in the availability of land, the size of the population will be self-equilibrating. Further, increases in available resources will, in the long run, be offset by increases in the size of the population. Countries with superior technology will have denser populations, but the standard of living will not be related to the level of technology, either over time or across countries." This implication is referred to as Malthusian trap . Oded Galor, David N. Weill. 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond." The American Economic Review . Vol. 90, No. 4, pp. 807-828. Compare p. 807. 17 Wolfgang Stolper, 1988, op. cit ., p. 70. 18 Schumpeter, 1912, op. cit. , p. 102. Compare translator's note 13, p. 143: "The remark about whole populations stamped out of the ground comes from the Communist Manifesto ." 19 Wolfgang Stolper, 1988, op. cit. , p. 70. 280
development, of its mechanism, in the form of a scheme to which the facts of development would generally conform. We look first at a general cause for the changes in the fundamental structure, i.e. in the level of the circular flow. We locate this cause in the fact that - as we expressed it - new combinations get driven through. We saw that when new combinations are carried through this can be attributed to the actions of a particular type of economic agent whom we called an "entrepreneur." The behavior of the entrepreneur differs substantially from that of other economic agents, who fit into the scheme devised by static theory to account for the economic activities of people. Finally we learnt about the different means with which the entrepreneur, in our sense, drives through the new combinations in the different organizational forms of the economy, through which he selectively channels the economy in new directions. These means have in common that with their help the agents of the static economy will be forced to serve new functions. The particular character of these means gives its stamp to the economy and thereby gives it a particular form. They are the principal distinguishing features of the different organizational forms - to a much higher degree than the aspects normally cited.
In Schumpeter's vision the entrepreneur, by carrying out an innovation and taking the chance to fail is the driving force of the process of economic change which in turn changes society. The entrepreneur is an entity that carries out and implements "new combinations." They may take the form of introducing new products, new methods or processes, identifying new markets or sources of supply, or creating new types of organization. More generally, any entity that can bring about new combinations, for instance, organizations, or even entire firms in Schumpeter's approach can serve the role of the entrepreneur. This holds not only for market processes, but also for those in politics, administration, the nonmarket- nongovernment sector, and society as a whole.
There are interdependencies between the sectors, which Schumpeter illustrated with the example of a physician. From an economic point of view, a physician in the traditional style with no capital equipment, just his acumen, experience, and judgment (and probably his family relations such as many dependents) is to be considered a worker. The underlying economic model has three factors of production: land, capital, and labor. This spirited, but impecunious doctor falls into the category of labor from that classical point of view. Sociologically speaking though - sociology was a new discipline that has been founded shortly before the seventh chapter was written - this very same, gifted physician is an entrepreneur, thinking about new therapies, but also about his own well-being and that of his dependents. 20 For instance, the physician from an economic point of view belongs to the factor labor, but from a sociological point of view he does not. He is a professional, which is reflected in his social status and prestige and not necessarily in his economic well- being. He cannot share the class consciousness of a proletarian worker, but he
20 Allen Janik and Stephen Toulmin. 1973. Wittgenstein's Vienna . New York: Simon and Schuster. 281
cannot join the Viennese opera ball, either. He is the owner of his own means of production and latently an entrepreneur. These means of production are not alienable; they have no market value, but can be the basis for entrepreneurial capital, for instance a clinic. In Schumpeter's own words, introducing the notion of the social pyramid, this reads as follows:
The social pyramid does not consist in economic building blocks. Economically, a successful physician has to be classified as a worker. Socially, however, he does not belong tout court to the working class. [Schumpeter, 1912, op. cit. , p. 528]
Of course, he becomes a Schumpeterian entrepreneur only, if he implements "new combinations" such as new therapies, treatments, medicine and the like. The medical profession and this may be an important policy conclusion, lends itself to entrepreneurship and may become a fertile cradle of innovation. The physician, by necessity, has to contend with both, risk and uncertainty: risk in the therapeutical outcome, uncertainty in his diagnostic work.
In contrast to Marx, Schumpeter saw next to the division of labor and capital the "social pyramid" as an important factor explaining the development of an economy. In capitalism, the entrepreneur has to hold a high social position in order to create a position of power, but entrepreneurship is not tied to capital ownership. The position of the entrepreneur is of a short-term nature and cannot be bequeathed to other persons.
His position as entrepreneur is tied to his performance and does not survive his energetic ability to succeed. His position as entrepreneur is essentially only a temporary one, namely, it cannot also be transmitted by inheritance: a successor will be unable to hold on to that social position, unless he inherits the lion's claw along with the prey. 21 The company, the goods which are present in the company, are just the dead shell of the [entrepreneur's] driving impulse. [Schumpeter, 1912, op. cit. , p. 529]
In the seventh chapter, Schumpeter discussed the repercussions of innovation outside the sectors, where the entrepreneurial initiative was taken. Not only the successful, but also the failed innovations have such repercussions, which reverberate through all the sectors. Economic development is not only characterized by upward effects, but also accompanied by downward movements. Adversely affected are those sectors, firms, and their accompanying institutions, which are substituted by successful innovations. Entire professions will disappear, while others need to be developed including the institutions, which they need for their prosperity. Schumpeter described the adverse consequences of growth and expansion as follows:
21 Here, Schumpeter is using a powerful metaphor. He refers to the company and the assets of the company as "prey", and the "lion's claw" as the entrepreneurial capability that generated the company in the first place. 282
The movement described is just one of two, the upward movement. Its counterpart is the downward movement in the situation of many economic agents. The downward movement is anchored in those static processes of production, which are particularly hurt by the price decrease, apart from the case that means of production as a consequence of development have to be delivered more cheaply than before. We have [502] already discussed this in the chapter on crises. There, we have also seen that the strongest of these effects, even if they are steady, are attached to particular periods in time. 22 Old forms of management and outdated production processes, all goods of a longer duration of life now will also for this reason be devalued - and not only by the increase in costs of the upswing period. This hurts all static firms more or less and will only exceptionally be compensated by repercussions. Therefore, the static economic agents suffer as producers get further and further pushed back. Also, often the leaders of yesterday belong to that case. They often fall in their position almost to unimportance. This process would also take place in case of an immediate response, but it is made worse by the fact that the most immobile economic agents do not respond fast enough and not thoroughly enough to it. Often, this is through a lack of intelligence and means. The craftsman cannot imitate any technical process, the owner of horse-driven carriages cannot open a second railway line next to the one which destroys his business. Often, there is also a lack of inclination. The skilled master of his own business might not be willing to turn into a factory employee, the factory owner might not want to become a salaried manager of a large company, even if this were the proper thing to do. Therefore, the prosperity or despair of economic agents is often inseparably connected to a certain type of management or method of production. The decline of that particular type of technology of production and management will necessarily bring about the decline of this type of economic agent. In the exchange economy, this gives a special character to the replacement of the not so suitable [ways of doing things, methods, etc.] by the more suitable. The inevitable debasement of what has been existing before therefore appears in a different light as compared to the current state reached by development. [503] So, a process of stunting, a decline in status and class of wide circles goes hand in hand with the upward movement. A lot of frictional profits disappear, which, however have only been a consequence of deficiencies in the mechanism of competition, but to which the economy had adapted and which have been the basis for many a person's livelihood. By development, entire layers of society lose the ground under their feet. Certainly not suddenly, but slowly. Through generations, the people in question live a poorer and ever
22 In principle, these would be the periods of liquidation. But many of these effects are slow in pushing through. Hence, it is more realistic to say that these are the periods which appear together with the periods of liquidation. They differ from the latter with respect to the length of time; their phenomena are broader, but less intense in violence. 283
poorer life with ever more bleak hopelessness. Slowly, they lose the moral and intellectual level, the more so, the darker the economic prospects around them are becoming. Their firms become poorer and poorer, tumble into ever more unfavorable situations, become breeding grounds for social grievances and fall into the hands of ever more despicable public persuaders. These companies dry up and decay. Compared to the magnitude of development as a whole, an alien observer would hardly pay attention to these phenomena. The losses are only the reverse side of development. They result because the services which have been the basis of economic life for those economic agents, are now being performed in an improved, better way. Even the pain which these losses cause, have their function in the faster removal of the outdated, in the incentive towards activity. But those people who participate in the drama themselves, and those who are close to them, have a different point of view. They would still be of a different opinion, even if they thoroughly grasped the nature of the process, which is all too often not the case. They cannot close their ears to the cries of those about to be crushed, when the wheels of the new era roll over them. This decline in status and class of many companies has, of course, an unfavorable effect on wages and rents. Moreover, the agents of these companies are either workers or people who live off rent, so that the devaluation either falls on wages or on the rents of land. If we still do not see this, then this is because those particular workers and landowners do not easily communicate their decline to the others [504]. In this respect, they rather form a special group. They are more strongly attached to outdated modes of company leadership than the others.
In the seventh chapter, the analysis of development is broader than the standard Schumpeterian view as espoused in his later book on Business Cycles ( op. cit. ). 23 Sociological and cultural factors such as the "social pyramid" and the physician as entrepreneur are no longer part of the explanation.
Similarly, in his later works the analysis of entrepreneurship differed from that of his earlier works. Shortly before his emigration, Schumpeter described the entrepreneur not only as a theoretical concept, but also as a concrete actor who could bring about structural change. 24 Even later, Schumpeter did not distance himself from these
23 The standard Schumpeterian view is as follows: innovating entrepreneurs are the initiating agents of change. Due to the herd like behavior of imitators and adaptors of the innovation, investments in new technology, etc. occur in clusters spreading through the economy and speeding up the process of development. The old equilibrium is left and evolves in a new equilibrium at a higher level. Innovations occur in rhythms which suddenly and vigorously push the process of development out of equilibrium and, later on, swing back to a new equilibrium. 24 Compare Joseph A. Schumpeter. 1929. "Der Unternehmer in der Volkswirtschaft von heute." (The Entrepreneur in the Modern Economy) In: Strukturwandlungen der Deutschen Volkswirtschaft . Editor. Bernhard Harms, 2nd. ed., vol. 1, Berlin: Reimar Hobbing, pp. 303-326. Reprint: Wolfgang F. 284
contributions, but referred to his own earlier work, for instance in the following reply to Arthur H. Cole: "In his presidential address at the 1946 meeting of the Economic History Association, Professor Arthur H. Cole leveled an indictment at economic analysis of the "theoretical" type to the effect that it has neglected throughout the phenomena of economic change. 1" In the footnote (1), the editor, Bernhard Harms, wrote: "This article was probably written in 1946 in response to a suggestion by Arthur H. Cole, who at this time was planning a research center in entrepreneurial history." 25 In his later works, Schumpeter described entrepreneurship as a narrower concept, focusing on large scale entrepreneurship. 26 As becomes obvious in the seventh chapter, Schumpeter was in his earlier works also concerned with small- scale entrepreneurship such as the physician as an entrepreneur and the entrepreneurship by organizations and other such entities. He also saw entrepreneurship in relation to structural change.
In Schumpeter's early analysis of economic development, not only economic aspects are important, but also social and other factors. In order to illustrate this, he gave the example of a successful physician. The health sector is an example, where other but economic considerations are important as well so that a pure economic analysis cannot be applied. The analysis has to be open so as to take other but economic variables into account. Cultural, social, and ethical aspects have to be included. In the seventh chapter, the emphasis is on the origins of change on the one hand, and the reverberations of this change through all sectors of the economy, polity, and society. All sectors are somehow affected, yet each differently. 27
12.3 Schumpeter on Health: many "Filiations"
Schumpeter tried to cover the interrelationships between the different sectors and the processes of change as they start in one sector and reverberate through all the others. Health issues are a prime example of phenomena which belong to all these sectors at the same time. For instance, the AIDS epidemic, in particular in Sub- Saharan Africa, as it affects a particular age group (young, educated males) has severe repercussions in the management echelons of business firms, the civil service, and the officer core of the military. This translates into repercussions in
Stolper, Christian Seidl. Editors. 1985. Aufsätze zur Wirtschaftspolitik . (Essays on Economic Policy). Tübingen: Mohr Siebeck, pp. 226-247. 25 Joseph A. Schumpeter. 1946. "Comments on a Plan for the Study of Entrepreneurship." In: Richard Swedberg. Editor. 1991. Joseph A. Schumpeter. The Economics and Sociology of Capitalism . Chapter 10, pp. 406-428, compare p. 424. 26 Mark Casson. Editor. 1990. Entrepreneurship . Great Britain: Edward Elgar. 27 An example is the development of a city as devised by Oppenheimer. He proposed to build a healthy city by forming cooperatives for housing and credit unions. Schools and houses had to be built so that the living environment was healthy and this posed new demands on architecture. Compare chapter 11. 285
politics and in cultural life. Any policy directed at the epidemic has to be implemented so as to take into account all these repercussions. An isolated approach such as focusing only on the medical condition and an effective pharmaceutical innovation is insufficient. 28
In his early work, Schumpeter proposed a different way of causation than the classical economists. An example is the explanation of a population increase and its consequences. The standard Schumpeterian explanation based on his later writings would be that innovating entrepreneurs through increases of productivity create life chances for more people. In the seventh chapter, he stresses the obverse line of causation. He held that the increase of the population was possible, because the economic room for it was already there. Entrepreneurs took advantage of this economic room. As a consequence, new combinations have created more employment opportunities and made it thus possible to feed more people.
In Schumpeter’s early approach to economic development, progress in medicine is one aspect of those new combinations which create more supply and, according to Say's Law (supply creates its own demand), more demand. More advanced therapeutical possibilities even create more demand in traditional forms of care. More people find employment and hence, more people can be absorbed in the growing cities, leaving the countryside, where the "new combinations" have not yet arrived, and where the social activity remains in a previous stage of development. This issue is relevant for the World Health Organization (WHO) and the Food and Agriculture Organization (FAO) stance on population control based on a Malthusian theory (compare footnote 16). Economic development, notably if it is homegrown, creates many new lines of work and gives rise to demand for labor. It also increases the production of food supplies. On the supply side it increases the opportunity costs of having and rearing children. In developed countries, children are luxury goods and not necessities as in developing countries. Therefore, an increase in the cost of raising them can even lead to an increased demand. Instead of imposing physical means of birth control, a Schumpeterian approach would emphasize growth and economic development. 29
28 An example of a step in this direction is the Nordrhein-Westphalian report on health goals to be implemented in between 2005 and 2010. Next to goals directed towards improving medical conditions, it contains structural goals such as health promotion and preventive measures among youths, attenuating factors that lead to illness in a working environment and strengthening the responsibility in particular of chronically ill patients. Compare: Birgit Fischer. 2005. Gesundheitsziele NRW – 2005 bis 2010 . (Health Goals NRW). Ministerium für Gesundheit, Soziales, Frauen und Familie des Landes Nordrhein-Westfalen. 29 There is support for Schumpeter's theory of innovation driven development on the basis of Cameralism and the Althoff system (compare chapters three and nine). The Cameralists were population oriented and treated people as a wealth of the small states. A closer look at the Althoff system showed that Althoff, an entrepreneurial bureaucrat of the Ministry of Culture, facilitated the 286
Schumpeter's approach is more complex than a simple type of causation. This can be illustrated by looking at the following example of a simple type of causation: "... it can reasonably be argued that the increase of population in the 19th century was due to progress in medicine, and that it exerted immense economic and political pressure and was a major driving force behind the introduction of mass production systems." (Peukert, op. cit. , p. 81). Here, progress in medicine is directly related to an increase in population and an improvement of the economy. One could even say that it is not so much medical progress, but economic advances which lead to the growth of the population and better health. While Schumpeter accepts this argument as a simple type of causation, his approach is more complex. Medical progress can be a necessary condition for population increase, but it is certainly not a sufficient condition. Sustained population increase is possible without improved health states of the population, but improved health states can lead to population decline as we currently witness. The mere ability to reproduce does not explain the choices people make in having children. Since children can be luxury goods, improved fertility and a higher income can lead to population decline. 30
In contrast to standard analysis in health economics, a Schumpeterian approach discovers a pan plea of entrepreneurs in health care trying out "new combinations" for diagnosis, treatment, and coping with adverse medical conditions. There are entrepreneurs among the various participants in the health industry, physicians and other health care providers, patients, the pharmaceutical industry, providers of health insurance, manufacturers of health products, etc. By looking at the different actors in the field of health products and services, a wide entrepreneurial potential comes to mind.
Some patients are more capable than others and can better cope with a handicap. They find new ways of doing things, of organizing themselves, perhaps gadgets that help them to better function within the social and cultural environment. Those patients behave just like an entrepreneur as described by Schumpeter. 31 State
immense medical progress taking place in Prussia. He devised ingenious ways to finance medical research, identified creative and able professionals and promoted their careers. 30 Gerhard Scheuerer and Jürgen Backhaus. 2004. "The 'Inexplicable' Population Decline in Thuringia." Erfurt University, Faculty of the State Sciences, working paper October 15, 2004. 31 For a discussion of the patient as an entrepreneur see, for instance, Auke Leen, "Competitive Producers and Consumers do not Need the Government: Pricing a Real Novelty Cannot be Deceptive." 2000, G. Meijer, W. J. M. Heijman, J. A. C. van Ophem & B. H. J. Verstegen. Editors. The Maastricht Isini-Papers , Vol. II. If we let the health industry turn to the market, we find that certain services can be provided in a cheaper way. Leen has argued that this is partly due to the entrepreneurial potential of the consumer. In our case, the consumer is a patient. Schumpeter did not make the same argument. He also saw entrepreneurial potential in government policies. 287
health and other policies could protect those entrepreneurial niches and even create room for entrepreneurship, but it is crucial to identify entrepreneurial potential.
How can entrepreneurial potential of patients be recognized? There is a problem in interpreting empirical data, if two distributions have different means, but overlap considerably. For instance, a sick older person may be more capable than a healthy young one, if the older person started out at a higher level of capability and maybe has learned to cope with the illness. The older, but "entrepreneurial" patient might still be fit for some kind of employment. While those people belonging to the entrepreneurial group are not in need of much support, those of the less capable group could be offered employment or educational programs that would help them to better cope with reality. Preventive measures would include the identification of groups at risk. Special attention should be given to those groups in society which are adversely affected by economic change.
Schumpeter wrote that two firms or two individuals are at the same point, but one is moving upward and the other one is going downward. The costs they face will be different as the upward moving company has able and flexible employees and the other one does not. What looks at the outset to be similar or almost the same can be radically different because one institution has entrepreneurial potential and the other goes by routine and will fail. The relevance for public health administrations and new corporate forms which can embody entrepreneurship is obvious. Many concrete proposals can be readily derived. 32 A policy that is directed towards an average company such as an average hospital, will fail as other qualities count and these are sometimes those of the outsiders who show entrepreneurial talents. All these conditions have a political dimension and only economic and political entrepreneurship combined holds out hopes for sensible solutions. This is the central message of Schumpeter's seventh chapter with respect to the issue of health.
Instead of facilitating entrepreneurship, regulations can prevent entrepreneurial initiative. Examples are medical malpractice suits. As Epstein has pointed out, “a strict liability rule could make a physician or hospital attentive to the treatment of those patients that come into their care, but it has (empirically) the greater vice of leading physicians and hospitals to withhold services in the first place. They do not believe that they can charge in fees enough to cover what they must pay in damages
32 For instance, in the areas of care for the homeless, care for the elderly, and for those who have difficulties adjusting to technical progress, care for people who are windfall losers of system change, people who immigrate through the prostitution circuit, people who immigrate through the drug circuit, people who suffer long-term consequences due to incarceration and the socialist regime, people who suffer long-term consequences because of malnutrition in their early years of childhood, people affected by anabolic substance supported sports programs, people with psychic trauma as a consequence of secret service activities in the family, and finally people drafted for work in contaminated sites with no adequate protective clothing. In all these cases, a middle of the road industrial firm will not be a successful player. 288
and defense costs.”33 Physicians and hospitals face medical malpractice suits in case of bodily harm done to patients. In being careful to avoid a malpractice suit, they cut their potential for innovation.
The pharmaceutical industry focuses on innovations. For instance, the case of Thalidomide and its repercussions illustrate that innovation can be a highly charged political matter. Thalidomide which caused a major medical, but also social and political crisis, is basically an effective medication for sleeping disorders with few side effects. If, however, prescribed contra indication to pregnant women, it can lead to a major disfigurement of the fetus. The case led to a regulatory wave, and only in recent years Thalidomide has reestablished its strong reputation. Here, the entrepreneurial uncertainty could not be contained, whereas the risk could be contained through regulatory and prescription instructions. Each innovation carries some residual uncertainty; events (positive or negative) nobody had imagined would ever happen.
Frank H. Knight's (1885-1972) distinction between risk and uncertainty is of major importance here. Knight emphasized the distinction between risk, which is insurable, and uncertainty, which is not. This is why risk can be regulated, but uncertainty cannot. Risk relates to recurring events whose relative frequency is known, while uncertainty relates to unique events whose probability can only be subjectively estimated. Insurance companies exploit the law of large numbers in order to reduce the risks. They pool the individual risks by setting a price that is based on the relative frequency with which an event in that particular group happens. 34 "Knight observed that while the entrepreneur can "lay off" risks much like insurance companies do, he is left to bear the uncertainties himself." 35 Schumpeter developed the role of the "entrepreneur" as an actor who creates uncertainties in the first place, but who is able to transfer this uncertainty into risk. To the bank, which lends money to the entrepreneur, his undertakings represent a risk, not an uncertainty.
The intricacies of the Thalidomide case are that the risks associated with the correct medication were well contained. The catastrophe ensued as a consequence of the unforeseeable, uncertain and wrong medication. Strangely, little research is available into what caused this peculiar prescriptive behavior.
In this section it has been illustrated that despite scant direct analysis on health and
33 Richard A. Epstein A. 1997. Mortal Peril. Our Inalienable Right to Health Care? Addison-Wesley Publishing Company, Inc. Reading, Massachusetts, p. 364. 34 Health insurances are regulated. As a consequence, "risk pooling" is no longer possible. Health insurances are not allowed to charge fees according to marginal costs. In the presence of asymmetric information, we face the problem of moral hazard. Health insurances are limited in charging marginal costs - this has an effect on entrepreneurship on the side of the patient. 35 Marc C. Casson. 1993. "Entrepreneurship." The Fortune Encyclopedia of Economics. Ed.: David R. Henderson. New York: Warner Books Inc., p. 631- 635. 289
health economics, the early Schumpeterian view on entrepreneurship and the interrelations between economic, social, and cultural change offers a new perspective to study health issues. A summary and conclusions follow.
12.4 Summary and Conclusions
The seventh chapter of Schumpeter's Theory of Economic Development , omitted in 1926 from the second edition, is not only a summary of the first six chapters, but also contains new elements which Schumpeter subsequently worked out in later works. By formulating one single theory, Schumpeter wanted to explain economic development and its societal consequences. The arts, politics, the social sciences, all these fields should somehow be covered by this unifying single theory. According to Schumpeter, the source of development lies in internal dynamics facilitated by entrepreneurial initiative.
Economic change is driven by internal dynamics which creates the room for innovations. The entrepreneur recognizes this room and by creating recombinations can take advantage of it. The same principle of internal dynamics accounts for all other sectors of the social system. There are interdependencies in entrepreneurial activity. From the point of standard economic theory the physician is a worker, but for Schumpeter's theoretical purposes he has to be considered an entrepreneur. This is reflected in his social status and prestige and not necessarily in his economic well- being.
In health economics, it is important to distinguish among different groups of people. Current health care policies do not seem to take different levels of individual entrepreneurial capability into account. Regulation is necessarily based on the principle of equality and tends to treat every case in an equal manner. This makes it difficult to distinguish between the subjectively different cases and backgrounds, notably when they look objectively similar.
A consequence of a comprehensive regulatory scheme is that there is hardly a niche for small-scale entrepreneurship. Yet, at the same time we can observe some great innovations in health care, for instance the cloning of embryos for stem cell research. It is a paradox that on the one hand, we see entrepreneurship in the health care market based on leading-edge research, but on the other hand we find that small- scale entrepreneurship is more or less subdued. A large portion of potential technological change, that part caused by small-scale entrepreneurship, is thus stifled by regulation.
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Chapter 13
Common Themes
Contents
13.1 Introduction
13.2 Cultural Development and Health
13.3 The Principle of Subsidiarity
13.4 The Role of the Public Sector
13.5 Final Remarks
295
Common Themes
13.1 Introduction
This book is on such authors, institutions, or constellations that are locked into the German language and therefore not readily available to modern international scholars. It has been stated at the outset that policy relevance is given with respect to the time for which the major classical works discussed have been written. This can be illustrated with respect to three common themes tying the work together: cultural development and health, the principle of subsidiarity, and the role of the public sector.
The relationship between cultural development and health is central in the works of Justi, Roscher, Schmoller, Menger, Oppenheimer, and Schumpeter. The principle of subsidiarity concerns a basic organizing principle of society. It has been introduced by Wolff as a principle of natural law and plays an important role in the work of Justi, Roscher, and Schmoller. Bücher’s proposal of nonmarket exchange, as well as Oppenheimer’s idea of cooperatives based on self-help can also be interpreted in this context. The role of the public sector in health care has been highlighted from various angles. For instance, public preventive health care measures were addressed by Justi and Wagner; health care legislation was discussed by Justi, Roscher, and Schmoller; government as a source of finance, as well as the limits of government, were stressed by Wagner; an innovative role of government was realized by Althoff, who created efficient incentives in the organization of medical research; and the introduction of mandatory catastrophic health insurance was proposed by Schmoller.
13.2 Cultural Development and Health
In his work, which dates from around 1750, Justi has pointed out that a healthy population should be counted as national wealth. From this point of view, health care expenditures are not consumption, but investment that restores, maintains and raises the productivity of labor. Roscher, whose work is in the tradition of Cameralism, has worked out the implication of this view. Increasing industrialization and rapid urbanization brought along the demand for highly specialized labor. One-sidedness of labor came about carrying negative health effects. Roscher has also described related developments such as long working days, working effort to the point of exhaustion, and child labor which causes ill health of the labor population. As a consequence, he predicted cultural and economic regress on a large scale. It was for this reason that Roscher pleaded for regulation of labor conditions in industry and a regime of strict monitoring and sanctions to enforce such legislation. Again the costs of such legislation can be viewed as investment in national wealth. This was one side of his proposal; the 296
other side went far beyond the factory and labor environment by directly addressing cultural progress. Mentoring and voluntary labor in communities by successful managers and other high-standing persons in the community, so Roscher, can prevent one-sidedness of labor and enables the disadvantaged to gain first-hand knowledge, thus leading to cultural development and better health.
In his Lectures to Crown Prince Rudolph, Carl Menger (1840 - 1921) stressed the importance of cultural development with respect to health.1 He also saw the importance of health as a factor contributing to the development of a nation, which is brought about by individual planning and provision for the future. His contributions are contained in his major work of 1868, Grundsätze der Volkswirtschaftslehre (Principles of Economics), which is the point of departure of Austrian Economics. His successors, Friedrich Freiherr von Wieser (1851-1926) and Eugen von Böhm-Bawerk (1851-1914), further developed Menger's thought and established the reputation of the Austrian school of economics. The major cornerstones of Austrian economics are methodological individualism, methodological subjectivism, and an emphasis on time. Menger's remarks on health issues concern individual provisions made for the future and errors that are the more likely to occur, the lower the cultural development of a nation. It has been illustrated that the idea of a subjective discount rate has found entry into modern health economics (compare chapter seven). Menger’s concept was broader because it contained the possibility of error depending on the cultural context.
Menger shared with Schmoller and Wagner the focus on cultural development, but they emphasized different aspects of health issues. Schmoller wanted to strengthen the subsistence economy as an important aspect of cultural and economic development, and he wanted to strengthen the position of women so that they could be the breadwinner of the family. From both measures, he expected a positive effect on the health of families. However, he considered these measures not as sufficient in order to support those who have fallen ill and their dependents. To guarantee that the appropriate care and sufficient income will be available, Schmoller saw a role for the state as legislator of obligatory insurance against catastrophic risks, such as health risks.
The role of the state in relationship to cultural development was analyzed by Wagner. He developed his Law with respect to a rise in culture. One of the major implications was an increase in preventive measures, not only in health care, but in all areas of life. Wagner interpreted economic and technological development as consequences of cultural development. Hence, with a rise in culture, the role of the state would rise over time.
Unlike Justi, Roscher, Schmoller, Menger, and Wagner, Schumpeter put the downside of economic development central in the Seventh Chapter (Leipzig, Verlag von Duncker & Humblot, 1912). Here, he has focused on the relationships between cultural and economic development and structural change. This part of his early work
1 Compare Erich Streissler and Monika Streissler. Editors. 1994. Carl Menger's Lectures to Crown Prince Rudolph of Austria . Aldershot: Edward Elgar. 297
appears only in the first edition of his Theory of Economic Development in the German language and has been omitted from future editions and from the English translation. In Schumpeter’s theory the decline of old branches of industry is as much a part of the process of economic development as the emergence and deployment of new, innovative sectors. Stagnation and decline of a sector has negative economic effects such as falling incomes and unemployment in the first place. There are secondary effects which go even deeper: a long and deep reaching socio-psychologic and cultural malaise among the population, in particular in the localities and regions where the stagnating and declining sectors are concentrated.
In the omitted chapter, Schumpeter entertained the vision that innovation takes place in institutions and organizational structures, and because of the interrelationships between the different sectors not only affects the entire economy, but promotes the evolution of society as a whole. The key concept of his theory is "the entrepreneur," that is the agent, who has the capability to innovate and is willing to face and accept the possibility of failure. In the Seventh Chapter , Schumpeter discussed the repercussions of innovation outside the sectors, where the entrepreneurial initiative was taken, thereby also looking at the downside of economic development. He was also interested in how sectors other than the economy proper provide a fertile "playground" for entrepreneurial talent that can end up in economic affairs. He widened his scope to encompass innovation in other social realms, in political, artistic, or scientific processes.
He tried to cover the interrelationships between the different sectors of the economy as the entrepreneurial initiative, but also the failed innovations, reverberate through all the sectors. Health issues are an example of phenomena which belong to all sectors at the same time. For this reason we see Schumpeter as an economist whose writings on economic, institutional and social development are relevant for what later became the subdiscipline of health economics in a more narrow form. We conceive of the discipline not as narrow, but as a broader social science based enterprise in scholarship. [GAP here]
Schumpeter’s theory seems to imply that such sectoral and local downfalls and its degrading effects on mental and on physical health are the price a society has to pay for its economic progress. Franz Oppenheimer (1864-1943) who was writing in view of a few decades of ongoing industrial development took a different position when in the industrial quarters of Berlin he was confronted with the type of distress described by Schumpeter. The type of legislation to safeguard the labor population, as proposed by Roscher and Schmoller and partly introduced since then could not prevent the second Founders crisis that led to the economic downfall of large segments of the population, both rural and urban. Oppenheimer developed a different solution. He identified overcrowding, poor food, exposure to cold and damp, prolonged and exhausting work, and unhealthy occupations as factors that lower the resistance to disease and make people prone to illness and early death. Oppenheimer widened his scope and studied what he called social illness : he saw the root of illness and epidemics in poor social and economic circumstances. He proposed a reform that leads to rural agro- industrialization and urban deindustrialization: the establishment of agricultural 298
cooperatives (Siedlungsgenossenschaften ) to create work, to develop faculties and to restore the physical and mental health of farmer factory workers. While health economics is typically done in terms of looking at the specific health conditions, institutions, and costs, Oppenheimer looked at the social and economic conditions, which gave rise to poor or better health.
From a Schumpeterian perspective the basic question is: where is the innovation to support the economic sustainability of the type of structural rearrangement proposed by Oppenheimer. If that is lacking there is little hope that Oppenheimer’s experiment can be successful on a larger scale. Oppenheimer wanted to create islands of innovative centers. The land bought by the members of the cooperatives was small, and therefore he suggested the use of intensive agricultural methods, requiring innovation by the members of the cooperative. The cooperatives are intended to be self-sufficient, which leads to the second major theme of this study, the principle of subsidiarity.
13.3 The Principle of Subsidiarity
The principle of subsidiarity as a principle of natural law was introduced by Christian Freiherr von Wolff (1679-1754), who founded economics within his general system of natural law ( jus gentium ). His focus was on the house, defined as the extended family or several extended families together, and not the individual as the relevant unit of decision making. This is important, since much health related services can best be provided within the immediate vicinity of the person to be treated. Even today, many such services are provided by the family directly. Conversely, individuals' health often depends directly on the lifestyle of the family. Based on Wolff, Roscher and Schmoller stressed the role of breadwinners and their dependents and Oppenheimer, much later, saw the individual with its circle of provision as the relevant unit. On this basis, he proposed the establishment of cooperatives that are self-sufficient. They form a house in the Wolffian sense.
Bücher has shown that exchange takes place in families and neighborhoods, based on the division of labor within the house or between houses. In its most basic form, exchange is in the form of gifts. It takes place in an environment where trust already has been established. The motive for gift giving or other nonmarket exchange as described in chapter nine is altruistic, but Bücher has made it clear that a counter gift is expected, hence an exchange takes place. In line with von Thünen's and Gossen's work, Bücher held that nonmarket economic behavior is grounded in the principle of marginal utility. His observations and interpretation of nonmarket exchange are included in this book because of the relevance of nonmarket arrangements in health care. The issue of nonmarket exchange in health care has become all the more important with the gradual collectivization of this sector.
As has been shown in the third chapter, members of a house should only receive help, if they cannot shoulder a task themselves. This means that the state or any other entity should not automatically intervene. With respect to health care, the 299
subsidiarity principle is a safeguard against both, the inefficient incentives that would result from a system of positive rights to health care each individual can claim from the state; and it also implies a restriction to what can be left to the free market. Herein lays the relevance of this contribution. Today, the principle of subsidiarity became an important principle of the European Union.
13.4 The Role of the Public Sector
Invoking the principle of subsidiarity, Wolff assigned the state an important role with respect to regulation and supervision. The state is not any public authority, but meant as an entity that makes sense; for instance, bureaucracy is not part of this concept of the state.2 The theoretical basis for these measures starts with Wolff and Paracelsus. The collective area, in the late medieval time, these were municipalities, church related charities and foundations, required health policy. The main example discussed in the book is the development and implementation of health insurance as shown by Schmoller (compare chapter eight).3 A different aspect was pronounced by the Cameralists (chapter four): the welfare of an economy can be increased by a better health state of the people. If one were to interpret the Cameralists narrowly, as the Physiciocrats did, one could even say that they saw health care as an area of public activity where state income could be nourished. According to this view, a better health state of the people means that the tax base can be broadened, and consequently that the state income can be increased through public health policy. Of course, this narrow view does not do justice to the Cameralists, who emphasized the well-being of the people, not just state income. In either case, health policy was a central concern.
Five hundred years ago, Paracelsus (1493-1541) saw a moderate role for the State with respect to quality considerations. Paracelsus lived in a highly regulated environment, where local monopolies prevailed through church and guild regulations. He fought against the negative consequences of those monopolies. An example given in chapter two were high prices of pharmacies, when Paracelsus’ own and effective medicine was inexpensive, but when local regulations did not allow him to give it directly to the patients. He demanded patents for his own work, because his medicine and his texts were often copied, sometimes in an incorrect way. Patents allow for the authenticity of the work. They also allow reaping the benefits of an investment in research and development. In Paracelsus’ case, these were the efforts to obtain knowledge through his wanderings and various contacts. Schumpeter later made the case with respect to the R & D expenditures of the pharmaceutical industry.
2 This refers to the Hegelian concept of the state, compare Birger Priddat. 1990. Hegel als Ökonom. (Hegel as an Economist). 403, Volkswirtschaftliche Schriften. Berlin: Duncker & Humblot. 3 Despite a steadily growing literature on Schmoller and the ‘Historical School,’ the implementation process has not been documented very well. Compare Erik Grimmer-Solem. 2003. The Rise of Historical Economics and Social Reform in Germany 1864-1894. Oxford: Clarendon Press, p. 9. 300
Today, Paracelsus’ achievements in the areas of medicine, philosophy, linguistics, and theology are widely acknowledged. For his social-political writings he is less well known, because this work has been found too late in order to be included in the complete Paracelsus edition. It contains his contributions to comprehensive health sciences including economic aspects of health. What tends to be overlooked is the core of Paracelsus’ central message. Integrating the science of medicine into the broader context of what today is social science but also, in his particular case, pharmacology. Oddly enough, today the regulation of medical practice makes exactly impossible what Paracelsus stood for. While Paracelsus emphasizes the need of looking at each specific situation and medical condition in each locality and circumstance in order to develop a tailormade cure and prophylaxis, current regulation emphasize unification and standards irrespective of specific dispositions and circumstances.
The connection of legal and economic analysis by Christian Freiherr von Wolff (1679- 1754) led to the creation of the field of political economy, which formed the intellectual basis, on which Cameralism further developed. After the disastrous events of the Thirty Years' War (1618 - 1648), human capital mattered. Hence, Cameralism emerged as a science of economic policy, which was directed towards economic development. It was not incompatible with intellectual developments elsewhere, notably in France, but yet totally different in its emphasis on economic development and the human factor in production. The most prolific writer of the Cameralists, who fully developed the science, was Johann Heinrich Gottlob von Justi (1717 - 1771). To him not only the quantity, but also the quality of the population mattered. Since health has an influence on both, he elaborated policy measures that would improve the health of the population in order to make economic development possible and to sustain further growth. Justi proposed measures to be taken by the state that would create incentives to stimulate agriculture and thus encourage an improvement of the nourishment of the population in order to enhance health; he came forward with ideas how to raise the quality of health care, for instance, he proposed the introduction of a supervisory board for health care provision; and he was concerned with the health of soldiers. As was common in Cameralism, Justi considered people the wealth of the nation. Health is therefore a matter of investment, not consumption; the healthier the population, the higher the wealth of the population.
Based on Cameralism, Wilhelm Roscher’s (1817-1894) work contains important tenets for health economics. Roscher has introduced the historic method to economics. He used an eclectic, descriptive approach in order to describe the evolutionary laws governing the development of the economy of a nation. A nation is characterized by its law, the state, and the economy, but also by religion, language, art, and science. Roscher concentrated on the first three factors of influence in order to explain the political economy of a nation. In line with Aristotle, he saw the family unit as the beginning of any nation's economy, and not the individual. The policy measures he proposed included the institution of early social welfare services, for instance a compensation scheme for accidents, as well as public regulation to protect vulnerable groups in society, such as wage laborers, women, and children. He was a fervent 301
advocate of the introduction of factory inspectors and was politically active in the implementation of these policy proposals In the Kingdom of Saxony.
Adolph Wagner (1835-1917), the public finance theorist and advocate, was interested in the limits of the state as a part of the economy. His prediction of the likely long-term development of the tasks of the state is known as Wagner's Law . He showed that with an advance in the culture of a society the tasks of the state will grow in the long run. Wagner has formulated the conditions under which the state can and should intervene in the economic process and thus created a basis for legislation. The motive of “Daseinsfürsorge” was important in areas considered as basic to society, such as railways, coal, or health care. For instance, he foresaw a role of the state with respect to health care if a highly volatile private investment was the alternative. Wagner identified major factors that explain the increase of health care as a state task, but did not take into account others such as negative effects of bureaucracy. When Wagner formulated his law, capital markets had not yet emerged and institutions were not fully developed. In order to show the relevance of Wagner's Law today, aspects of both, the presence of capital markets and modern institutions, have been included in the discussion in the chapter. When combined with the Baumol-Bowen Hypothesis and research results of the theory of bureaucracy, Wagner’s Law gains relevance today.
Gustav Schmoller (1838 -1917) treated health issues as part of the larger Social Question which had arisen during Germany's industrial revolution. Farmers and workers had moved from the country to the cities to find employment in the new established and expanding factories. A proletarian class formed and dissatisfaction was high. Schmoller wanted to insure the major risks in workers lives. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop. Hereby, he considered health a central variable which had an influence in his proposals for economic policy. Schmoller created the scientific basis for the social reform in Germany (1864 – 1894). To this effect, he organized a professional think tank of his colleagues, the Verein für Socialpolitik . If Schmoller’s idea were followed today, we only had obligatory basic health insurance and a moderate state influence in health care. The sector of health would not be treated differently from any other industry and not as a policy field. Therefore, many issues that today are at the center of health economic debates would become mute and irrelevant.
Friedrich Althoff (1839-1908), the leading Prussian administrator in the Ministry of Culture and Science for more than a quarter of a century, created incentive compatible structures in which science and scholarship could thrive. The so-called Althoff System refers to the systematic approach standing behind Althoff's science policy. This had an effect on all sciences, but here, we concentrated on the implications for medicine and public health. At the time, the industrial development had significant effects in relation to disease. For instance, new diseases emerged among the proletarian class of the cities, and this required new ways to view and treat these diseases. Althoff took patronage of medical research by supporting scholars with maverick ideas. He founded institutes and hospitals to further experimental and diagnostic research. Under Althoff, Germany introduced public health legislation, as in the case of combating tuberculosis. 302
An increase in speed of scientific progress in the field of medicine, as well as other fields could be shown during and shortly after the era Althoff. The relevance of the Althoff System concerns the organization of scholarship in general and in this sense of health issues in particular. Althoff was an entrepreneur as described by Schumpeter in the omitted Seventh Chapter .
13.5 Final Remarks
The earlier authors stress the relationship between cultural development and health, which is not independent of the role of the public sector. For instance, the Cameralist states competed with each other for human capital and resources not by military means, but by way of cultural and economic development. The principle of subsidiarity, introduced by Wolff as a principle of natural law, formed the basis of their policies. Based on this principle, there is only a minimal role of the state, a recurring theme in the works discussed.
The three themes discussed distinguish the historic approach from the new health economics. The first two themes, culture, and the principle of subsidiarity, do not figure prominently in this work, and are even missing in most current textbooks in the field.4 With respect to the third theme, it has been shown in the preceding chapters that the historical approach focuses on a minimal role of the state and stresses the development of markets. In contrast, the more modern approach concentrates on market failure.5 Therefore, the contributions presented in this book can only partly be subsumed under the concepts of current health economics. The thesis in this book is that parallel to what we can observe in other disciplines, the difference between the old health economics and the new health economics lies in the extreme specialization of the new health economics, whereas the old health economics was based on all sciences of the state and even beyond, including ethics and technology. 6 Hence, the perspective of the historical authors is much broader than what is available now.
4 Compare e. g. Friedrich Breyer, Peter Zweifel. 1999 (3). Gesundheitsökonomie . (Health Economics). Berlin: Springer; Thomas E. Getzen. 1997. Health Economics: Fundamentals and Flow of Funds. New York: John Wiley & Sons, Inc.; Sherman Folland, Allen C. Goodman and Miron Stano. 2001 (3). The Economics of Health and Health Care. Upper Saddle River: Prentice Hall. 5 Compare the entry: “Market Failure,” in: Anthony J. Culyer. 2005. The Dictionary of Health Economics . Edward Elgar. Cheltenham, UK, p. 207. 6 A comparison of the sciences of state and the current social sciences is given by Jürgen Backhaus. 2006. “The Sciences of State as a Research Paradigm.” Eds. G. Meijer, W. J. M. Heijman, J. A. C. van Ophem, B. H. J. Verstegen. 2006. Heterodox views on economics and the economy of the global society. Mansholt publication series, Vol. 1. Wageningen: Wageningen Academic Publishers, pp. 39-48. 303
References
Backhaus, Jürgen. 2006. “The Sciences of State as a Research Paradigm.” Eds. G. Meijer, W. J. M. Heijman, J. A. C. van Ophem, B. H. J. Verstegen. 2006. Heterodox views on economics and the economy of the global society. Mansholt publication series, Vol. 1. Wageningen: Wageningen Academic Publishers, pp. 39-48.
Breyer, Friedrich and Zweifel, Peter. 1992. Gesundheitsoekonomie. (Health Economics). Berlin: Springer.
Anthony J. Culyer. 2005. The Dictionary of Health Economics . Edward Elgar. Cheltenham, UK.
Folland, Sherman, Goodman, Allen C. and Stano, Miron. 2001 (3). The Economics of Health and Health Care . Upper Saddle River: Prentice Hall.
Getzen, Thomas E. 1997. Health Economics: Fundamentals and Flow of Funds . New York: John Wiley & Sons, Inc.
Grimmer-Solem, Erik. 2003. The Rise of Historical Economics and Social Reform in Germany 1864-1894 . Oxford: Clarendon Press.
Priddat, Birger. 1990. Hegel als Ökonom. (Hegel as an Economist). 403, Volkswirtschaftliche Schriften. Berlin: Duncker & Humblot.
Streissler, Erich and Streissler, Monika. Editors. 1994. Carl Menger's Lectures to Crown Prince Rudolph of Austria . Aldershot: Edward Elgar.
304
Chapter 14
The Old and the New Health Economics
Contents
14.1 Introduction
14.2 Overview by Chapters
14.3 Summary and Conclusions
305
14.1 Introduction
A popular view of health economic scholarship is that the discipline dates back to Arrow’s seminal contribution of 1963.1 The basic paradigm of the modern science of health economics is mostly neoclassical and this led to the development of a theoretical and rigorous science. Yet, as has been shown in the preceding chapters, since five hundred years, scholars have been interested in economic issues of health including the social and political sphere. Their contributions are typically ignored in modern health economics. In this final chapter, the question arises how the old generation of health economics differs in perspective from the new health economics.
A. Culyer has defined health economics as the “application of economic theory to phenomena and problems associated with health.” 2 This definition includes the contributions of the historical authors, but does not consider the social and political aspects discussed by the German and Austrian authors writing on health issues. 3 As has been shown in chapter thirteen, the common themes, culture, the principle of subsidiarity, and the role of the state, are embedded in the theoretical context of the state sciences and give a glimpse of what is missing.
From a methodological point of view, a theory or an argument needs to be first reconstructed and then appreciated in the context and in the terms in which it had been proposed. Historical authors should not be judged according to terms, which have not been present at the time when they were writing ( whig history of economic thought). 4 In order to fulfil this requirement, the following terms have been derived from the preceding chapters: demand, supply, information, optimal contracts, the market for pharmaceuticals, insurance, technology, institutions (hospitals/ nursing homes), evaluation of life and injuries, social insurance, and policy and future issues.5 Most of
1 Kenneth Arrow. 1963. "Uncertainty and the Welfare Economics of Medical Care." American Economic Review . December 1963, 53 (5), pp. 941-73. With his path breaking article, Arrow set the research agenda for health economics. Compare, for instance, the special issue edited by Mark A. Peterson, 2001. Kenneth Arrow and the Changing Economics of Health Care . Journal of Health Politics, Policy and Law . Vol. 26, No. 5, October 2001. 2 Anthony J. Culyer. 2005. The Dictionary of Health Economics . Edward Elgar. Cheltenham, UK, p. 150. 3 Compare, for instance, Erik Grimmer-Solem. 2003. The Rise of Historical Economics and Social Reform in Germany 1864-1894. Oxford: Clarendon Press. He wrote on pp. 9-10: “Because Gustav Schmoller and the ‘younger Historical school’ were tackling problems that were never only economic but also social and political, Schmoller and historical economics also have a considerable broader relevance to the history of Imperial Germany.” 4 But see as a major representative of the whig approach Mark Blaug, 1985, Economic Theory in Retrospect . Cambridge: Cambridge University Press). 5 These terms are also addressed in the following textbooks: Friedrich Breyer, Peter Zweifel. 1999 (3). Gesundheitsökonomie . (Health Economics). Berlin: 306
these terms can also be found in the present textbook literature in modern health economics. In part 14.2, these terms are squared with my substantive chapters (2 – 12). The chapter ends with a summary and conclusions.
14.2 Overview by Chapters
In the following matrix, the entries on the vertical axis show the major terms according to which the overview is presented. On the horizontal axis, though, I present the authors discussed in the preceding chapters.
Table: The New versus the Old Perspective
2 3 4 5 6 7 8 9 10 11 12 Paracelsus Wolff Justi Roscher Wagner Menger Schmoller Bücher Althoff Oppenheimer Schumpeter
A Demand A / 2 A / 3 A / 4 A / 5 A / 6 A / 7 A / 8 A / 9 A/10 A/11 A/12 B Supply B / 2 B / 3 B / 4 B / 5 B / 6 B / 7 B / 8 B / 9 B/10 B/11 B/12 C Information C / 2 C / 3 C / 4 C / 5 C / 6 C / 7 C / 8 C / 9 C/10 C/11 C/12 D Optimal D / 2 D / 3 D / 4 D / 5 D / 6 D / 7 D / 8 D / 9 D/10 D/11 D/12 Contracts E Market for E / 2 E / 3 E / 4 E / 5 E / 6 E / 7 E / 8 E / 9 E/10 E/11 E/12 Pharmaceuticals F Insurance F / 2 F / 3 F / 4 F / 5 F / 6 F / 7 F / 8 F / 9 F/10 F/11 F/12 G Technology G / 2 G / 3 G / 4 G / 5 G / 6 G / 7 G / 8 G / 9 G/10 G/11 G/12 H Institutions H / 2 H / 3 H / 4 H / 5 H / 6 H / 7 H / 8 H / 9 H/10 H/11 H/12 (hospitals, nursing homes) J Evaluation of J / 2 J / 3 J / 4 J / 5 J / 6 J / 7 J / 8 J / 9 J/10 J/11 J/12 Life K Social Insurance K / 2 K / 3 K / 4 K / 5 K / 6 K / 7 K / 8 K / 9 K/10 K/11 K/12 L Policy and L / 2 L / 3 L / 4 L / 5 L / 6 L / 7 L / 8 L / 9 L/10 L/11 L/12 Future Issues
Springer; or: Sherman Folland, Allen C. Goodman and Miron Stano. 2001 (3). The Economics of Health and Health Care. Upper Saddle River: Prentice Hall. 307
Paracelsus, Theophrast von Hohenheim (1493-1541)
In his social-economic writings, Paracelsus, Theophrast von Hohenheim (1493- 1541) made early contributions to health economics, which can be summarized with respect to the terms on the vertical axis as follows:
(A / 2) Demand
The demand for health is distinguished from the demand for health services, which is partly dependent on the demand for health. 6 Paracelsus emphasized both, demand for therapies and demand for health. He identified the conditions of live and work with the causes of disease. Therefore, he emphasized that the cure can only be found in the immediate environment of the condition. An example is his work on the causal relationships between economic conditions and practices and resulting medical conditions such as in the case of miners’ diseases in the silver mines in Tirol.
In contrast to this approach, in contemporary health economics the local aspect is not mentioned as an important factor for the demand for health or health services.
(B / 2) Supply
Paracelsus discussed medical supply in his critique of physicians’ behavior. In addition, he described monopolistic tendencies within the organizations of physicians and pharmacists and delineated welfare consequences; for instance, it was difficult for new talent to gain access; poor care at excessive prices resulted. In the second chapter, Paracelsus’ analysis has been related to the phenomenon of rent seeking in health care.
The relevance of Paracelsus’ approach lies in the recognition of all kinds of barriers that prevented medicine then to be effective - and still do now. Although he was not an academic outsider, having earned his doctorates in both, internal and external medicine, at the University of Ferrarra, he noticed that the use of the Latin language was a barrier to exclude newcomers. Paracelsus also was upset about local monopolies such as local doctors and pharmacists. For instance, he accused some of the local doctors to concentrate on diagnosis and on making money, instead of therapy and human dignity. This relates to the modern hypothesis that doctors may create more patient demand than there would be if they acted purely in the interest of the patient. 7 Paracelsus has provided early evidence in favor of the hypothesis of supplier- induced demand, but clearly goes beyond. For instance, a patient's trust in the physician offers the possibility of fraud by the health care provider. He described all kinds of fraudful behavior by health care providers. Further, he showed how legal
6 Compare the entries “Demand for Health” and “Demand for Health Services,” Antony Culyer. 2005. The Dictionary of Health Economics. Cheltenham: Edward Elgar, pp. 91-92. 7 Compare the entry “supplier-induced demand” in The Dictionary of Health Economics, op. cit. , p. 333. 308
protection of the pharmacists makes it possible that the effective medicine is provided at an artificially high price. This, however, sometimes meets with the interest of patients, who – provided that the substance is effective in both cases - might prefer the more expensive medicine over the inexpensive version.
(C / 2) Information
Paracelsus recognized information asymmetries. For instance, he explained the phenomenon that some patients prefer the more expensive medicine over the cheaper one as arising from a lack of information on the side of the patients. He sometimes added gold or other precious metals to the effective substance in order to make his medicine more acceptable to such a patient. Another information asymmetry mentioned by Paracelsus was the lack of knowledge on the side of patients on how much effort it took a physician to learn about available cures and to gain the experience needed. He therefore suggested charging income related prices.
In the modern discussion on health economics different positions with respect to information asymetries prevail. Culyer has noted that in health care, information asymmetries “have deep-reaching consequences for its organization, regulation and financing, mainly in order that the lay person (patient, potential patient, carer) is not exploited.” ( op. cit. , p. 175). Goodman and Musgrave take the contrary position. According to their view, health care is no different from other markets, where complicated products are sold; consequently, the consumer (patient) does not need special protection.8
Paracelsus’ time was far less specialized; markets hardly existed. He combined the search for the "just" price for medical care with discourses on professional ethics and stood for income-based fees in medicine. He took into account that only highly trained, experienced professionals could provide reliable health services.
(D / 2) Optimal Contracts
Optimal contracts are characterized by incentives leading towards efficient behavior (compare the discussion of incentive compatible structures in chapter ten). In the case of Paracelsus, we find that he insisted on patents for his medicine and medical authors' copyrights, clearly understanding the incentive for effective propagation of knowledge. Patents and copyrights serve two functions: first, they provide an incentive to gain knowledge, and second, they allow for authenticity. In the case of Paracelsus, his writings were often copied, and in many cases errors were added in the process which he sought to prevent by a medical author’s copyright. In modern medicine, plagiary is still a concern, even on a global scale.
8 Compare, for instance, John C. Goodman, Gerald Musgrave. 1992. Patient Power. Solving America’s Health Care Crisis. United States of America: Cato Institute. 309
(E / 2) The Market for Pharmaceuticals
Paracelsus is the founder of pharmaceutical medicine. When he did research in the mines of the Fuggers in Tirol, he criticized them for charging too high prices and, in one instance, even for providing ineffective medicine. In Basel, he criticized local pharmacists for overcharging patients. Paracelsus oftentimes provided inexpensive medicine to his patients, which he prepared himself. He noted that the effective substance was inexpensive to acquire or to make. He further demanded patents and copyrights, because he wanted to remove barriers to medical progress.
In the context of innovations, Schumpeter has made this argument later in a refined form. Schumpeter’s protective argument applies to the pharmaceutical industry (compare footnote 15 in chapter ten). In the case of high costs for R&D, a monopoly might be preferred to a competitive market, where these expenditures might not take place. The argument has to be put in a broader context when a licensing procedure is involved. Successful innovations require three parts: first, the process of discovery may lead to an invention. The invention needs to be perfected so as to arrive at a product. The prototype can be patented. The patent, however, is not sufficient for marketing the product. The licensing requires repeated tests for safety and effectiveness. In many cases now, in the pharmaceutical industry, but also in car parts, the time required for licensing the product by far exceeds the time for research and development (death valley). Obviously, this detracts from the duration of the patent protection and thereby reduces the patent rent, which in turn is the incentive for developing the product in the first place.
Current health policy is also directed at the pharmaceutical market beyond the stage of patenting and licensing. For instance, a variety of cost-containment measures are directed to offset some consequences of third-payer reimbursement. Schemes of own contributions, listings of medicine to be reimbursed, and incentives to pharmacists for providing generic medicine instead of the more expensive brands raise awareness and responsibility with respect to the use of medicine among patients, phycisians, and pharmacists.
In this highly regulated political environment of pharmaceutical markets, the question arises, where does the economic contribution of Paracelsus consist in? Paracelsus shows an efficient solution for the pharmaceutical market by demanding patents and medical authors’ copyrights. On this point, his view can be seen as a precedent of what is presently current in health economics, but his perspective is broader. Paracelsus is the founder of pharmaceutical research. To him it is a matter of finding the effective agent and to overcome the Aristotelian medicine. In modern health policy discussions the view prevails as if the effective agents are known. In contrast, Paracelsus was always in search of the effective medicine and demanded patents and copyrights, because he did not want to hinder medical progress.
(F / 2) Insurance
In the absence of health insurance, Paracelsus’ patients paid for the cure out of 310
pocket. Health care spending was constrained by market prices, but the resulting market prices were not always perceived as just by Paracelsus. As has been shown in chapter two, several causes played a role: the presence of monopolies, fraud by physicians, information deficits on the side of the patients and poverty of patients. Paracelsus proposed to provide health care for free to patients, who could not afford it, and to charge income-related fees otherwise.
How to deal with the uninsured is still a challenge to health economic policy. Paracelsus’ example has been discussed by Epstein, who has shown that the voluntary provision of health care services by physicians and hospitals for free to those uninsured patients, who needed it, is preferred to the mandatory provision of health care.9 As has been shown in the discussion in chapter eight, if physicians and clinics are required by law to provide health care for free to the needy and to people without health insurance, it is well likely that some physicians and in particular small hospitals will have to close their practice, because they cannot afford the amount of free care they have to provide. The result is that less health care is being supplied than before. For this reason, Epstein, a supporter of free markets in health care, concluded that the decision for the supply of free health services has to be a voluntary one by the single physician and hospital rather than a mandatory decision by the state.
(G / 2) Technology
According to Paracelsus, nature does not provide us with goods ready to use. Men have to work in order to develop those goods. While God has given us iron, he has not told us, what could be made of it. God wants men to develop crafts and sciences. 10
(H / 2) Institutions (Hospitals, Nursing Homes)
Paracelsus urged people to help each other. He noted the danger of infection when the sick are at one location, notably at battlefields, but did not make similar remarks with respect to hospitals and nursing homes. In his time, charities, in particular churches ran hospitals.
(J / 2) Evaluation of Life
Paracelsus asked, who can tell the value of a life? And related, who can tell the value of physicians’ services? The roots of early life insurance based on evaluation of life
9 Richard A. Epstein. 1997. Mortal Peril. Our Inalienable Right to Health Care? United States of America: Cato Institute. 10 Compare part III, “Mensch und Werk,“ (Man and Work), Paracelsus. Paracelsus. Arzt und Gottsucher an der Zeitenwende. Olten und Freiburg im Breisgau: Walter Verlag, pp. 149-206.
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reach back into his time.
(K / 2) Social Insurance
Paracelsus demanded that people should not have more income than they needed. If they have more, then they should give it to those, who are in need of income.
(L / 2) Policy and Future Issues
Paracelsus’ extensive writings contain visions of policy and future health issues.
In conclusion, we can state that Paracelsus wanted physicians, pharmacists and other health care suppliers to compete with each other in order to meet patients’ needs with high-quality services. He combined the idea of competition with ethical considerations. His basic economic concern was to remove all kinds of barriers that prevented the medical marketplace from working. Herein lays the main difference from what we observe currently, namely an increase in the regulations surrounding health and health care. The regulation of medical practice today is at odds with what Paracelsus stood for. Although he would make the case for undistorted markets in health care and a reduction of bureaucracy, he would not forget the needs of the poor. A modern health policy proposal on the basis of Paracelsus’ work would call for an integration of the science of medicine into the broader context of social sciences. It would call for less regulation of medical practice.
Christian Freiherr von Wolff (1679-1754)
In Paracelsus’ writings, the definition of a science was not yet given explicitly. More than a century later, Christian Freiherr von Wolff (1679-1754) formulated the conditions, which disciplines have to fulfil in order to become a science.
(A / 3) Demand
Central in the third chapter stood Wolff's perspective of the order of society and its implications for health and health care. According to Wolff, society is not based on individuals, but on social units such as families, which form the basic unit of decision making. In the families, a division of labor takes place according to individual skills and endowments. Wolff introduced the principle of subsidiarity. Extended families should only receive help, if they cannot shoulder a task themselves. In the case of health care this means that the state or any other entity should not automatically intervene. According to Wolff, optimal medical care is based in the extended family, “the house.” This is an environment that in the time of Wolff included the sphere of production.
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(B / 3) Supply
Quality considerations stood central in Wolff’s analysis of supply of health care. For the field of medicine, he provided clear definitions and demanded more rigorous methods for medicine to become a scientific discipline. For instance, he recommended the use of protocols in order to evaluate different healing methods, which should be applied repeatedly under similar conditions. Over time, medicine became a more rigorous, scientific discipline, which made rapid strides, but the basic economic problem has not been solved: how to pay for it? With the principle of subsidiarity, a principle of natural law, Wolff laid the basis for an answer.
(C / 3) Information
Wolff contributed to the flow of information by systematizing the knowledge of his time.
(D / 3) Optimal Contracts
When Wolff developed the principle of subsidiarity, one could hardly speak of free markets, because the influence of the church was still dominating public life. Nevertheless, it can be presumed that Wolff had the vision of a free market.
As has been shown in chapter three, on the one hand the subsidiarity principle is a safeguard against the inefficient incentives that would result from a system of positive rights to health care each individual can claim from the state; on the other hand it implies a restriction to what can be left to the free market. Herein lays the modern relevance of this contribution.
Both, a free market approach to health care, as well as a national health care system could gain from Wolff’s thought.11 In proposals, which are in favor of a free market in health care, a restriction to the workings of the free market is typically missing. Similarly, if we look at the other extreme, in a national health care system, there is provision of health care by the state and the result is a shift of care provided from the family or other social entity to hospitals, nursing homes, etc. The question arises whether the state is the more efficient provider of health care. (Compare the discussion of economies of scale in chapter six, in particular footnote 13). This question is addressed by Victor Fuchs, but he does not mention the subsidiarity principle. Fuchs wrote: “Whether a dependency relationship with the state will prove less burdensome [than intrafamily dependency relationships, my add., U.B.] remains to be seen. There is also the question of whether the efficient provision of impersonal ‘caring’ is feasible.” 12 As has been discussed in chapter thirteen, the subsidiarity
11 A national health care service can either be financed by taxes or by compulsory health insurance. 12 Victor R. Fuchs. 1986. The Health Economy. Cambridge, Massachusetts: 313
principle concerns a basic organizing principle of society, which goes beyond what is now discussed as optimal medical care.
(E / 3) The Market for Pharmaceuticals
Wolff was concerned with the quality of medicine including pharmaceuticals, which he wanted to improve by raising the scientific standards of production and development. He did not deal with economic aspects of the subject.
(F / 3) Insurance
Wolff deductively dealt with the conditions that are at the basis of insurance, but followed a different route. He studied these conditions and devised the principle of subsidiarity accordingly.
(G / 3) Technology
With respect to technology, Wolff described the state-of-the art of all crafts and sciences of his time. He did not deal with economic aspects of technology.
(H / 3) Institutions (Hospitals, Nursing Homes)
Exept for his description of measures of hygiene within hospitals and other institutions, Wolff did not focus on the subject. As has been shown in the second chapter, Wolff relied on deductive reasoning, and in his argument there was little room left for Christian mission. 13 At his time, institutions were mainly charities run by the church. His main political adversaries were the Pietists, Francke and Lange. Francke is the founder of a major charity, the socalled Franckeschen Stiftungen .
(J / 3) Evaluation of Life
In Wolff’s time, early life insurance was present, but Wolff did not attempt to mathematically deduct the value of life.
(K / 3) Social Insurance
An important theme by Wolff was the provision of care to the elderly and the elderly ill.
Harvard University Press. 13 Wolfgang Drechsler, 1997, "Christian Wolff (1679-1754). A Biographical Essay." European Journal of Law and Economics. Kluwer. 4, pp. 111-128, see p. 113. 314
The answer he derived within the framework of the principle of subsidiarity is both effective and efficient.
(L / 3) Policy and Future Issues
Wolff studied all sciences and provided a systematic overview. On this basis, he also discussed policy and future issues. When he described the Chinese system as an admirable example, mainly for its philosophy and ethics (Confucianism), but also for its educational system and methods of health care, he had to leave the University of Marburg, as well as the city of Marburg. Behind these measures stood the Pietists, his political adversaries.
Johann Heinrich Gottlob von Justi (1717 - 1771)
Wolff followed the mathematical-deductive method and a priori reasoning, an approach he does not share with the Cameralists (compare chapter four). Wolff has in common with the Cameralists the pursuit of basic values, which he considered as contributing to the happiness of people.The Cameralists valued health, education, and virtues such as a good work attitude as factors contributing to the wealth of a state, which they wanted to increase. The focus of the third chapter was on the contributions with respect to health and health care by Johann Heinrich Gottlob von Justi (1717 - 1771), the most prolific writer of the Cameralists.
(A / 4) Demand
The Cameralists recognized the importance of higher productivity from a work force, whose health could be maintained or restored beyond what was possible during or right after the Thirty Years' War (1618-1648). They considered a healthy population the basis for wealth creation. Health is thus seen as part of a state's capital endowment. By focusing on so-called population measures, Cameralists tried to improve the health, education and work attitude of the population in order to increase the wealth of the country. Since the happiness of the people is the focus of Justi's analysis, their health is his central concern and he considers every conceivable aspect in which the state through policy and administration can improve the health state of the populace. For instance, he focused on agricultural policy in order to prevent starvation and starvation-related diseases. He tried to improve sanitary conditions and initiated public health laws. He suggested that war should not be led in wintertime in order to minimize human losses.
In conclusion, we find that the perspective of the Cameralists differs substantially from the current mainstream, where demand of health and health services does mean a personal investment in health when interpreted as stock and not as flow. (Culyer, op. 315
cit. , p. 92). This interpretation does not take into account a country’s higher productivity from a work force, whose health can be maintained or restored beyond what was possible before. Cameralists have interpreted the stock of people’s individual health not only as a personal investment, but as part of the wealth of a country.
(B / 4) Supply
Justi recommended measures to improve the quality of health care provision, for instance by the introduction of local supervisory committees composed of professional health care providers and by setting up statistical databases on illnesses and deaths in order to study the causes of diseases.
(C / 4) Information
In order to reduce mortality and morbidity, the Cameralists gathered information on illnesses and the causes of deaths. They set up statistical databases in order to improve the effectiveness of the health care system. The resources saved by keeping in check the threat of epidemics could be accounted for. The emphasis was different. In current statistics, there is little emphasis on health benefit accounting. The resources saved by health care measures do not enter national budgets on the benefit side.
The Cameralists’ concern for quality of health care services provided is also a concern in a time of cost-containment in health care. By introducing more efficient procedures some hospitals are able to improve the quality of health care provided. 14 Other examples point in the opposite direction. Control and monitoring of the quality of medical procedures and of pharmaceutical products often increase bureaucratic requirements, leaving less time for the physician to spend with the patients. This might negatively affect the quality of individual care. The quality of a nations’ health care system might be affected, if certain therapies were excluded from reimbursement, or if treatment options are not made available in that country.
(D/ 4) Optimal Contracts
As has been shown in chapter four, the policies proposed by Justi and other Cameralists contain incentives in order to achieve the desired goals; a healthier, better nourished, basically educated and more stable population leads to higher economic growth.
14 Compare Wolfgang Pföhler. 2005. „Wir wollen jedes zehnte Krankenhaus in Deutschland.“ (We Want Every Tenth Hospital in Germany). Frankfurter Allgemeine Sonntagszeitung. October 23, 2005, p. 39. 316
(E/ 4) The Market for Pharmaceuticals
Cameralists believed that professional councils should take a bigger role in the regulation of production and sale of pharmaceuticals. Their main concern was to improve the quality of medicine.
(F / 4) Insurance
Following the tradition of Wolff, Justi developed a catalog of duties of men. These are partly in response to the conditions, under which insurances would arise otherwise.
(G / 4) Technology
The Cameralists furthered technolocal research and use of technology. They introduced the Cameralist sciences at Universities. The question how to finance technology was a central question of Cameralism. To Roscher, who firmly stood in the tradition of Cameralism, the financing and development of technology was the key issue to cultural and economic development of a nation. (Compare chapter five).
(H / 4) Institutions (Hospitals, Nursing Homes)
Cameralists addressed institutional care and measures of hygiene within institutions. For instance, the encyclopedic work by Johann Peter Frank, a physician and cameralist, appeared in nine volumes and contains detailed instructions of hygienic measures with respect to medical procedures, care of patients, and the environment, hospital rooms and homes. (Compare footnote 25 in chapter four). The work is considered basic to the science of hygiene.
(J / 4) Evaluation of Life
To Cameralists, the value of life was high. For instance, Justi undertook efforts to abolish the death penality and to facilitate jail sentences. He was concerned about the loss of human lives during warfare.
(K / 4) Social Insurance
The duty of men included to work as long as possible, only the elderly ill should be housed and cared for in nursing homes.
(L / 4) Policy and Future Issues
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By creating a statistical basis of socio-economic data, the Cameralists created the basis to devise and implement policy measures. They combined practical experience with the study of Cameralism, which they established and developed.
Wilhelm Roscher (1817-1894)
Wilhelm Roscher continued in the tradition of the Cameralists (compare chapter five). He is generally recognized for the introduction of the historic method in economics. Based on Aristotle, he saw the family unit as the beginning of a nation's economy, the basis for his social-political and economic approach to health and health care.
(A / 5) Demand
Roscher has called attention to negative health effects of the work in factories. He held that overtime work, work by children, and an extreme division of labor could lead to illness, both physical and mental, and eventually to cultural regress. He was an advocate of factory inspectors in order to remedy the inhumane conditions in factories.
As pointed out in chapter five, the changes brought about by the industrial revolution were affecting individual and family responsibilities and led to profound changes in society, such as an increase in the specialization of labor over time, which can lead to negative health effects. As a relief from the one-sidedness of the work performed, Roscher has recommended that professionals serve time at their local communities. They could serve as mentors to the members of the lower classes. This would also be a contribution towards closing the gap between the employed and the unemployed. Society could eventually achieve a higher cultural level, which Roscher considered the prerequisite for better health and better education.
(B / 5) Supply
Roscher noted that the freedom to run a business has to be restricted in the case of physicians and pharmacists, where harm can be done to the patient or consumer. He feared that in the case of freedom of concession, some physicians would start mixing poison and produce medicine for abortion as evidence from North America and Imperial Rome has shown. He predicted that in the case of freedom of concession, specialists would not be affected severely, but that family doctors, whom he considered the most useful part of the profession, would sink deeply.15 Therefore, he advocated for restricted access to the profession and in the tradition of the Cameralists for state control of the science of medicine.
15 Wilhelm Roscher. 1913. 8 System der Volkswirtschaft . Third Volume. Nationalökonomik des Gewerbefleißes und Handels . Compare § 57, pp. 304, 305. 318
Roscher has also noted that professional help could not arbitrarily be replaced by motivated, but unprofessional volunteers as this would lead to a loss in the quality of health services provided. This was in particular relevant for charities.
(C / 5) Information
According to Roscher, a follower of Christian ethical principles, providing information is not sufficient to make Adam Smith’ “invisible hand” of the market work. In the example of medicine, laws of concession, professional ethichs, regulation with respect to consumer and worker security, and a healthy morale of the people are also required.16 The main task of the factory inspector is to gain information from within the factory. The factory inspector has to get the information from the “factory population” and provide it to the state with the goal to initiate state regulation (Roscher, op. cit. , § 60a., p 339). Roscher does not consider the local level as the appropriate level, because communities were too dependent on local industries (Roscher, op. cit. , § 60a., p 340).
(D / 5) Optimal Contracts
Roscher thought about how Christian ethic could be applied in the mid-nineteenth century. He “paid due tribute to the social achievements of the massive, well- organized Roman Catholic charities of his time, but preferred the more discriminating Protestant institutions.” (H. R. C. Wright, op. cit ., p. 151) Roscher was not in favor of services that would help the able-bodied in general, such as soup kitchens. He considered them as too tempting for many people to participate. He preferred a more selective charity where only deserving people should receive help sufficient to the case.
(E / 5) The Market for Pharmaceuticals
For apothecaries Roscher demanded concessions like those described for physicians. His concern was that under free competition, pharmaceuticals were not available on Sundays and at night. He also thought that many of the seldom used medical products, which were nevertheless indispensable, would not be offered anymore (Roscher, op. cit. , § 57., p 305, fn. 4).
16 Harold R. C. Wright. 1995. “Wilhelm Roscher and English Christian social thought.” Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 149-158, p. 150. 319
(F / 5) Insurance
With respect to accident insurance, Roscher has suggested that the factory owner as the employer should carry the costs of an accident when an employee is involved, independent of who caused the accident. The victim and his dependents should receive reimbursement. Therefore, a factory owner has to take out accident insurance, which should then become part of the price of the product and thereby is shifted onto the consumer (Roscher, op. cit. , §63, p. 380).
(G / 5) Technology
Roscher was critical of state regulations concerning technology. In principle, he wanted to leave the initiative to introduce technical changes and to develop new products to the free forces of the market (compare Roscher, op. cit. , § 58, pp. 318- 324).
(H / 5) Institutions (Hospitals/ Nursing Homes)
Roscher was in favor of an open society. For instance, in the case of health care he opposed locking up the mentally ill and suggested to integrate them in society, as far as this was feasible. The mentally ill pose a burden on society and Roscher demanded tolerance from society.
In current health economics, we also find evidence in support of integration of the mentally ill in society (compare footnote 11, chapter one). The modern evidence is based on a comparison of costs and benefits of inpatient and outpatient treatment programs. Roscher’s argument was driven by ethical considerations.
(J / 5) Evaluation of Life
An important part of Roscher’s methodological efforts was to put attention to the statistical methods of economic investigation. The statistical methods to evaluate life in early life insurance schedules were part of these efforts. “Although his approach to statistics was far different from today’s, his attempts brought widespread recognition of both the value and the problems of the use of mathematics in economics.” 17
(K / 5) Social Insurance
Based on Aristotle, Roscher saw the family unit as the beginning of a nation's
17 Peter R. Senn. 1995. “Why had Roscher so much influence?” Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 53-105, p. 93. 320
economy, the basis for his social-political and economic approach to health and health care including social insurance. This was also consistent with his religious views and the experience of the time in which he lived.
(L / 5) Policy and Future Issues
Roscher’s main point discussed in the fifth chapter, to look into the work environment in order to prevent negative health effects, has a place in any modern health economic program. The one-sidedness of labor, even for high-standing professionals, and the deep division between those employed and those unemployed could lead to negative health effects such as depression and emotion- related diseases on both sides. Roscher’s idea to overcome this division between the employed and the unemployed could become part of any modern employment concept.
Adolph Wagner (1835-1917)
Adolph Wagner followed the deductive method, but was politically engaged in the same sense as Roscher and Schmoller. As has been shown in the sixth chapter, his social-political and economic contributions considered are both positive and normative.
(A / 6) Demand
An implication of Wagner’s Law is that preventive measures in medicine (and other fields such as jurisprudence) will become more important in the future than curative measures. This affects demand of health services, but how precisely demand will be affected Wagner left open.
(B / 6) Supply
The implication of Wagner’s Law that preventive measures in medicine will become more important in the future than curative measures also affects supply of health services; presumably in the direction of more sophisticated and complex health care provision, but this was not described by Wagner.
(C / 6) Information
Information is crucial to a highly developed society as referred to by Wagner. He predicted that the state will become more influential over time with an increase in the amount and quality of information by cultural and technical development and the general sophistication and interconnectedness of a complex society. This prediction 321
is referred to as Wagner's Law or the law of increasing state purposes. It does not necessarily follow from Wagner’s Law that public expenditures will grow over time, but that the influence of the state will grow. It is derived under the provision that only the state, an efficient provider of goods and services, could provide sufficient capital to finance expensive technologies. Of course, this was formulated before the emergence of national and global capital markets. As has been shown in the sixth chapter, Baumol and Bowen have refined Wagner’s reasoning by including national and global capital markets.
(D / 6) Optimal Contracts
Wagner provided an early formulation of the public goods theory by formulating the conditions under which the state can and should play a role in the provision and finance of goods and services. For instance, private investment can be highly volatile. If continuous funding is required for finishing a long-term research project, then this would according to Wagner be a reason for public funding or state intervention in order to secure private funding. With these systematic normative conditions for a role of the state in the provision of services Wagner created a basis for legislation.
(E / 6) The Market for Pharmaceuticals
There is broad evidence that Wagner’s prediction with respect to a major focus on preventive medicine is right. In recent years, medicine's focus has indeed been shifting from palliative to preventive measures for curing major diseases and developing regenerative therapies. Research in the development of pharmaceutical products, medical technology, biotechnology and related fields requires a high amount of capital for funding, but the prospect of potential cures and regeneration might improve the rate of return on investment. In terms of human capital and productivity, especially among older, experienced workers, medicine is becoming a more justifiable expense so that private investment might take place. In case of high volatility of private investment, Wagner suggested public funding.
(F / 6) Insurance
A health policy program following the tradition of Wagner would consider the capacity of the medical industry to be an engine for the economy, both incorporating and supplanting much of current high-tech industrial developments. This would have to be combined with an insurance system providing a minimum social safety net as proposed by Wagner and later postulated by Baumol and Bowen. The insurance system would take care of basic needs, but would not be restrictive to those patients, who wanted to purchase health care beyond what is paid for by insurance. This way, new technology can continuously be developed and refined. New economies of scale and scope could be realized by further automation. Eventually, the technology 322
would be affordable by those who have to rely on insurance payments. As Baumol and Bowen have shown, a factor limiting the introduction of technology in medicine would then be the minimum of individual care required.
(G / 6) Technology
Wagner’s point of departure was the recognition that there is an increase in the cultural and technological complexity of society over time. His basic conclusion should be kept in mind that the cultural and technical development of a society leads to an increase in the influence of the state, for instance in the legal and health environment, where preventive measures become more important over time. In an effort of cost-containment, modern health economic policy proposals are often directed towards a restriction of the introduction of medical technology, a short- sightedness from Wagner’s point of view.
(H / 6) Institutions (Hospitals, Nursing Homes)
The altruistic and help motive was central to Wagner. He wanted private initiative and the churches to set up hospitals and nursing homes. For the state, he foresaw only a supervisory role.
(J / 6) Evaluation of Life
As a protestant Pietist, Wagner did not consider evaluation of life as an economic topic, and therefore did not make contributions.
(K / 6) Social Insurance
To Wagner, the help and altruistic motive was strong. With respect to social insurance, he requested help by close family members and the circle within the church, in contrast to Schmoller, to whom the actuarial principle was central.
(L / 6) Policy and Future Issues
Wagner contributed to both, positive and normative health economics. With his systematic normative conditions for a role of the state in the provision of services he created a basis for legislation.
The current so-called explosion of health care expenditures is partly due to factors identified by Wagner, such as a shift toward preventive services and technological advance, but partly also to deficiencies in the health care organization, such as bureaucratization and generous reimbursement payments by health insurances. 323
Policy relevance requires a distinction between these two sets of causes. Meanwhile, his analysis has been refined in many ways. For instance, public choice economists focused on the aspect of bureaucratization, and Baumol and Bowen studied productivity differences among various sectors of the economy in order to explain the development of the public influence over time. These refinements have led to a more realistic explanation of what we currently observe.
Carl Menger (1840-1921)
Carl Menger focused like Roscher, Schmoller, and Wagner on the role of education and economic development in order to raise the culture of a nation.
(A / 7) Demand
Menger showed that the behavior of those people who plan ahead for the future is wealth-enhancing, and their life-style is healthier than that of others. They are more likely to make investments which will raise the culture of a nation.
(B / 7) Supply
Menger was a proponent of low state influence. He described the medical market as a competitive market, where in the absence of health insurance patients pay out of pocket for medicine and treatment.
Today, the option that patients pay for the desired treatment and medicine out of their pockets is not always available. Moreover, for reasons of cost-containment, in some countries certain treatments and drugs are withheld from the market by state regulation. Health economists are often seen as professionals who help to draw the lines between wasteful expenditures of health insurances and expenditures for what is considered legitimate patient demands. In a country, where this advice is politically binding, the therapies excluded will no longer be available, not even to the patients who would be willing and have the means to pay for them. If we apply Menger's analysis, there is no such role of the health economist that would lie in the exclusion of effective therapies and treatments. Menger would never accept a state appointed and paid health economist. Patients would have to find a consultant in the private market and they would have to pay for this service.
(C / 7) Information
In a low-standing culture, where the amount and quality of information is at a low level, individual time-horizons tend to be short and people are more prone to make errors with respect to the recognition of their state of illness and the effectiveness of medicine than in a higher developed culture. The higher the culture, the longer will be the individual time-horizon, and the less likely people are to make errors. The 324
argument that people make errors was later criticized as paternalistic by Ludwig von Mises, another proponent of the Austrian School.
Menger’s point of errors is relevant in current health care. Information about health- related topics is widely available; as the Internet and the media flood consumers with medical data, some patients have started demanding specific drugs and treatments from their physicians. They might be wrong in what they consider the proper treatment, and their hopes might be unrealistic. Not only patients can be wrong, physicians are also likely to make errors. Danzon, Pauly and Kington (1990) have shown the effects of medical malpractice costs on the costs of health care. Evidence from the study suggests that higher costs of medical malpractice, which are reflected in higher costs for physician’s liability insurance, are passed on to patients’ fees. 18
In contrast to Menger’s point of errors, which did not receive much attention, the impact of time preferences on health became one of the main pillars of health economics. Individual time preferences are important in cost-effectiveness studies, which involve the modelling of health effects; for instance, the improvements in health brought about by an intervention (compare the discussion in the seventh chapter). Subsequently, health effects can be translated into estimates of capacity to work and ability to function. Time preferences also play a role in the explanation of addictive behavior of persons, who discount or ignore future consequences of their behavior; and time preferences are an important factor in the decision to buy insurance coverage.
(D / 7) Optimal Contracts
Menger never made institutional arrangements a subject of his analysis. He did not see the problem of incentive compatibility.
(E / 7) The Market for Pharmaceuticals
Menger did not discuss the market for pharmaceuticals.
(F / 7) Insurance
Individual time preferences are likely to influence the decision to buy health insurance coverage. Under a scheme, where health insurance is voluntary, a preference for present consumption can lead to unmet health care needs in the future.19 Those people, who evaluate the benefit of a present consumption as higher
18 Compare Patricia M. Danzon, Mark V. Pauly, and Raynard Klington. “The Effects of Malpractice Litigation on Physician’s Fees and Incomes.“ The American Economic Review . 80.2, May 1990, pp. 122-127. 19 Compare Friedrich Breyer and Peter Zweifel. 1999 (3). Gesundheitsökonomie . 325
than that of a future consumption, are likely not to take out sufficient insurance or do not save enough as a provision for old age, and politicians, interested in being re- elected, typically represent the same, short-sighted preferences. Therefore, interference by politicians would not solve the problem.
(G / 7) Technology
Menger did not explicitly discuss issues of medical technology.
(H / 7) Institutions (Hospitals, Nursing Homes)
Menger did not give applications with respect to hospitals and nursing homes.
(J / 7) Evaluation of Life
The “evaluation of life” issues did not belong to Menger’s topics.
(K / 7) Social Insurance
Menger did not treat social insurance as a topic.
(L / 7) Policy and Future Issues
In chapter seven, the connections between individual time preferences and human capital investments have been shown. Human capital investments are determined by outside conditions and opportunities, but driven by individual decisions reflecting individual abilities, dispositions, knowledge, and experience. These economic and psychological insights are often overlooked in modern health policy proposals. From the point of view of health policy, one has to distinguish between innate factors or those otherwise immutable, i.e. not subject to choice, and those that are subject to choice. Only those that are subject to choice can be influenced so as to change health related behavior.
(Health Economics). Berlin: Springer, p. 158. 326
Gustav von Schmoller (1838-1917)
His scholarly counterpart in the question of method, Gustav von Schmoller (1838- 1917), agreed with Menger, in line with Roscher and Wagner, on the purpose of political economy to raise the cultural level of the population with health being an important aspect of culture. Schmoller focused on the creation of markets as the basis of the economy. He considered insurances based on actuarial principles as an important part of the economy.
(A / 8) Demand
Schmoller investigated the life and work environment with respect to the causes of illness and accidents. He saw demand for health services not as an isolated cause, but in relation to poverty and the social question.
(B / 8) Supply
According to Schmoller, the supply of basic health care services had to be provided through the market.
(C / 8) Information
Insurance companies based on actuarial principles need information about the probabilities and impact of an event occurring in order to set the premium in relation to the real experience of a population. Schmoller proposed to set up company based insurances and insurances based on other small groups of society so that sufficient information on probability and impact of risks would be available (compare the discussion in chapter eight).20
(D / 8) Optimal Contracts
Schmoller discussed optimal contracts in the context of his industry and guild studies. He described incentive compatible contracts. 21
20 Schmoller proposed the cooperative solution: small groups would form their own group insurance companies. This solution minimizes negative consequences stemming from moral hazard and avoids adverse selection. Compare Kenneth Arrow. 1963. “Uncertainty and the Welfare Economics of Medical Care.” American Economic Review . 53 (5), pp. 941-973. 21 Compare the separate issue by Richter: Zeitschrift für die gesamte Staatswissenschaft. Jürgen Backhaus: Schmoller als Rechtsökonom, The Elgar Companion of Law and Economics
327
(E / 8) The Market for Pharmaceuticals
Schmoller did not discuss the market for pharmaceuticals
(F / 8) Insurance
Schmoller investigated insurance solutions for preventing hardship for families. He laid the basis for an insurance system based on actuarial and, by implication, market principles, but guaranteed by the state. He wanted to introduce catastrophic health insurance, which would be obligatory, and beyond that open up the market so that people could buy additional health insurance for more encompassing coverage.
(G / 8) Technology
Questions of technology are central factors of explanation in Schmoller’s work.
(H / 8) Institutions (Hospitals, Nursing Homes)
Schmoller discussed questions of institutions (hospitals and nursing homes) in the context of the so-called “New Social Institutions.”
(J / 8) Evaluation of Life
In his study on the costs of war, Schmoller took up early questions of the evaluation of life.
(K / 8) Social Insurance
Schmoller was the architect of social insurance, but had reservations about unemployment insurance. In the case of basic sickness, old-age, and accident insurance he was in favor of general, compulsory insurance-based compensation through a variety of independent insurance funds at the local level, run jointly by workers and employers and with scope for choice between different schemes. Schmoller was not in favor of a large bureaucracy, for instance in order to administer the accident insurance, but of policies which can be abolished when the market grows. 22 Schmoller considered market failure as a problem of development.
22 International comparative studies of liability law and worker compensation had shown that in many cases damages could not be claimed, because proof of 328
Modern discussions about such issues as care for the elderly, catastrophic illnesses and epidemics, although in principle open to an insurance based approach, are often dealt with by specific tailored programs. For instance, in Germany the old age care insurance system (Pflegeversicherung) is a political solution to what, in principle, is a problem that any insurance market could readily handle. This specific political solution, designed by Dr. Blüm to garner the vote of the elderly, is laden with disincentives and hence inefficiency and predictably has produced a large deficit; this deficit has to be counted under the Maastricht criteria. Had a market based approach been opted for, the political electoral effect could not have been attained, but the deficit, if one had occurred, would not be a mortgage on current fiscal policy. The insurance based approach has the advantage of creating incentives to reduce risks and losses. This is not true for most program based projects.
(L / 8) Policy and Future Issues
In contrast to Roscher, who excluded many issues due to his religious beliefs, Schmoller included those issues and founded an encompassing social science.
While Schmoller has propagated insurance solutions to be provided by the market, he also saw the need of state provision of catastrophic health insurance which he wanted to make obligatory. While current health economics emphasizes market failure and uses market failure as an argument for state intervention, Schmoller took the opposite approach and argued for political intervention in order to support and trigger market forces so as to provide market solutions for social policy objectives. Instead of emphasizing market failure, Schmoller tried to create the conditions under which markets can evolve.
Karl Bücher (1847-1930)
Karl Bücher recognized that the market could not solve the problems of the time (compare chapter nine). Instead of demanding political interference, he took a different route. He has contributed an organizing principle, which affects both, supply and demand of health and health care services.
(A / 9) Demand
By focusing on the nonmarket elements in health care, Bücher has shown that next to provision of health care through the market and/or the state, nonmarket exchange is an alternative method of organization. By pointing out the characteristics of nonmarket exchange, Bücher has shown how high quality goods and services such
negligence was not possible. For this reason, Schmoller opted for compulsory industrial accident insurance. Grimmer-Solem, 2003, op. cit ., p. 211. 329
as health care can be provided outside the market. Reciprocity, as it occurs in gift exchange, borrowing and lending, and the voluntary exchange of labor, is a precondition for the provision of high quality.
As has been shown in chapter nine, a focus of the current discussion in health economics is on altruistic behavior on the one hand, and market solutions on the other. Under a system relying heavily on altruism, not enough health care services might be provided and often not in the quality required. While market solutions in health care tend to provide sufficient quantity of supply, they are loaded with ethical problems and require a close control of quality. If Bücher’s concept is compared to these alternatives, then the added value of his contribution becomes clear: his concept assures the provision of high quality services. Bücher’s principle could be introduced as a supplement to any existing system in health care. From this chapter the suggestion follows that state policy towards health issues should focus on fostering such reciprocal relations instead of providing services directly.
(B / 9) Supply
Bücher emphasized the cooperation between physician and patient in a non- standardized relationship. He was not in favor of regulation, for instance through standardization of treatment, because valuable information pertaining to the individual case can get lost.
(C / 9) Information
Bücher described very specific information that was for instance at the basis of gift exchange.
(D / 9) Optimal Contracts
Bücher studied cultural and political institutions in order to see how economies worked. He did not describe standardized relationships, but very specific circumstances.
(E / 9) The Market for Pharmaceuticals
Bücher did not study the market for pharmaceuticals.
(F / 9) Insurance
Bücher’s estate at Osaka shows that a focus of his interest was on banking and insurance, in particular with respect to asymmetric information.
330
(G / 9) Technology
Bücher did not study technology as a factor of explanation.
(H / 9) Institutions (Hospitals, Nursing Homes)
Bücher studied different examples of institutions in order to identify those that have been successful.
(J / 9) Evaluation of Life
Evaluation of life was not a topic studied by Bücher.
(K / 9) Social Insurance
Bücher looked for alternative arrangements in the family circle and beyond.
(L / 9) Policy and Future Issues
For policy issues, he referred in particular to historical studies. He searched for those policies that have been successful in the past.
Friedrich Althoff (1839-1908)
Friedrich Althoff, the legendary Prussian administrator in the Ministry of Culture and Science, showed how to set up a university system by the state in a meaningful way. Through his skillfully designed science policy, he created an institutional environment in which science and scholarship could thrive. The focus in chapter ten was on medical science and scholarship.
(A / 10) Demand
In the field of public health and the introduction of public health legislation, Althoff’s influence was visible. He tried to take effective measures to control and eliminate tuberculosis and other infectious diseases. If one would follow Althoff, then one would investigate the value of the latent, but continuing, benefits of averting outbreaks of epidemics caused by temporarily vanquished diseases and count them as a real product in the national health economy. Medical-economic issues would not be ignored by governments in arriving at health care budgets. 331
(B / 10) Supply
The promotion of excellent medical researchers, whom Althoff provided with an adequate working environment, led to more innovations and generally an improvement of the quality of health care services supplied.
(C / 10) Information
Althoff’s science policy included a network of scholars who gathered relevant information on science and scholarship. This network was an important pillar of the Althoff System .
(D / 10) Optimal Contracts
It has been shown for medicine and public health that an innovative push was brought about through a change in the incentive structures of research related institutions such as polytechnic institutes, universities, and hospitals. Several measures taken by Althoff led to this change. For example, he improved the informational basis by setting up a statistical database and subsequently an informal network, through which he discovered talented scholars. He supported them and created new positions by founding research institutes and hospitals to further experimental and diagnostic research in health care. By offering chances to outsiders and opening the borders, Althoff contributed to a system of science and scholarship that was excellent.
(E / 10) The Market for Pharmaceuticals
The example of Behring shows that Althoff took advantage of the willingness of the pharmaceutical industry to provide funding for pharmaceutical research. As has been shown in the chapter, Althoff combined a public good, basic research, with a private good, in this case patents resulting as a by-product, and was thus able to gain funding for the public good.
(F / 10) Insurance
Schmoller’s work on insurance was well-known to Althoff, who supported Schmoller’s research program and the appointments Schmoller proposed.
332
(G / 10) Technology
Althoff is particularly relevant on issues of medical innovation and technology. Currently, health policy initiatives are largely focused on cost-containment. In contrast, Althoff emphasized the performance aspect pushing for research innovation and technological improvement. At the same time, as has been shown in chapter ten, he developed innovative methods of finance for the new research and development.
(H / 10) Institutions (hospitals/ nursing homes)
Althoff’s projects concerning foundation of new hospitals and modernization projects have been described in the chapter. Althoff tried to represent the different groups of society. For instance, he gave funds for the development of a Protestant institute for tropical medicine, but then also supported the foundation of a Catholic one.
(J / 10) Evaluation of Life
His fight against tuberculosis shows that Althoff was aware of the value of life as an economic category. The value of life could be increased if the disease could be prevented and the life could be extended for those tuberculosis patients who could be healed. Althoff made the fight against tuberculosis a government policy.
(K / 10) Social Insurance
In his appointment policies, Althoff favored those who stood behind Schmoller’s social insurance system.
(L / 10) Policy and Future Issues
From chapter ten the conclusion follows that the structure of the organization matters. Althoff’s approach focuses on innovative funding and the promotion of excellent researchers, whom he discovered and for whom he created an appropriate work environment. His science policy with respect to medicine has no equivalent in modern health policy.
Franz Oppenheimer (1864-1943)
The contribution by the physician Franz Oppenheimer, who looked for a solution that leads to a decline in morbidity and mortality of the population, lies largely outside of the account of modern health economics (compare chapter eleven).
333
(A / 11) Demand
After Oppenheimer had recognized that the main sources of mortality and diseases are to be found in the social environment, he turned to the social sciences and developed his vision of a new order of society. Central to his vision were individual freedom and a healthy social and productive environment.
Oppenheimer wanted to create a healthy social environment of work and production. In order to reach this goal, he proposed a land reform and the establishment of cooperative settlements. Confronted with massive unemployment in the industrial quarters of Berlin, crowded living conditions and illness, he devised a scheme that would bring industrial laborers back to the land by buying defaulted estates and turn them into small agro-industrial farms. With respect to health, he tried to achieve both, a reduction in exposure to infection and an improvement in the individual resistance to infection. Sufficient nutrition and rest, as well as adequate housing and sanitary conditions are factors that increase the individual resistance to disease and make it thus less likely to become ill or die of a disease, but central to Oppenheimer was individual freedom. He expected that people who live in freedom in a cooperative settlement are healthier than those who live in crowded industrial quarters or those who live under fiefdom at the countryside.
(B / 11) Supply
As a physician, Oppenheimer, the son of a reformist Rabbi, was rather unpriviledged. He had to work in the proletarian quarters of Berlin, where he witnessed urban housing problems. In this environment he had the thought that economics is the medicine of society.
(C / 11) Information
Oppenheimer noted that medicine requires information on social conditions.
(D /11) Optimal Contracts
Oppenheimer did not make contributions with respect to optimal contracts.
(E /11) The Market for Pharmaceuticals
Oppenheimer is more interested in the therapeutical side, including social therapy, than in the market for pharmaceuticals.
334
(F / 11) Insurance
After his emeritation in 1917, Schmoller insisted that Oppenheimer became professor and continued giving the introductory lecture to students, where insurance was a central topic.
(G / 11) Technology
Technology did not belong to the central explanatory variables by Oppenheimer.
(H / 11) Institutions (Hospitals, Nursing Homes)
According to Oppenheimer, institutions make medical success possible. The cooperatives he created on estates east side of the Elbe were financed with the proceeds from the unemployment insurance and should create conditions that would never lead to unemployment again.
(J / 11) Evaluation of Life
Oppenheimer did not consider evaluation of life as an economic topic.
(K / 11) Social Insurance
Oppenheimer saw self-sufficiency as a criterion of social insurance.
(L / 11) Policy and Future Issues
Oppenheimer’s proposal adds to what is currently discussed in health economics and goes beyond in providing a realistic political perspective in developing the underpopulated countryside of, for instance, parts of Germany with undervalued real estate for whatever historical reasons. As has been shown in chapter eleven, Oppenheimer’s proposal centers on land rent; land is meant in the sense of natural resources in general. As has been shown in chapter thirteen, the implications of Oppenheimer’s, Althoff’s and Schumpeter’s work go beyond what is represented in the matrix, which serves as the guideline for this chapter.
Joseph Schumpeter (1883 - 1950)
In his early works, Schumpeter tried to integrate the discipline of economics in a larger social-economic context (compare chapter twelve).
335
(A / 12) Demand
Based on Schmoller’s empirical (historical) approach, Schumpeter looked for one and the same theory that could explain both, economic development and its cultural consequences. In the omitted "Seventh Chapter" of The Theory of Economic Development 23 he also sketched the broader picture of health in economic development containing important implications for health policy. The entrepreneur, although explicitly not the last cause, is a driving force in his explanation of development. Schumpeter has pointed out that demand for health services, as well as supply, occur both in the same social and cultural context. A medical supply structure has first to be in place, before demand can be met.
(B / 12) Supply
In his early work of 1912, Schumpeter defined the entrepreneur as any entity developing new combinations. He described the example of the physician as entrepreneur, which has implications for both, demand and supply of health services as the physician partly determines demand. Patients have entrepreneurial potential, too. People can do much themselves to improve their health. We can observe an increasing interest in nutritional supplements or exercise into late life, thus providing fertile markets for spas, health-related tourism, and other sectors of the economy. Schumpeter also saw the possibility of a public entity acting as an entrepreneur. Althoff is an example of a state bureaucratic entrepreneur in a Schumpeterian sense who devised an efficient state system, in this case for education. The implications of Althoff’s actions in particular for medicine have been shown in chapter ten.
(C / 12) Information
Schumpeter has described information as a cultural condition, for instance, a common language and common ideas about treatment are required in the relationship between patient and physician.
(D / 12) Optimal Contracts
A situation and the state of development are dependent on culture. Schumpeter described behavior as being optimal in one situation, but not in another, dependent on the cultural context.
23 Leipzig, Verlag von Duncker & Humblot. 1912. 336
(E / 12) The Market for Pharmaceuticals
In his early work on development and the cultural context, Schumpeter was not so specific as to include the market for pharmaceuticals. His later argument concerning the justification of a monopoly in the presence of high costs of R&D stems from his more mature work and is now a central argument in the literature on the market for pharmaceuticals.
(F / 12) Insurance
Schumpeter was not specifically interested in questions of insurance.
(G / 12) Technology
Basic research in medicine can lead to effects on applications developed in the commercial sector such as the cosmetics industry. These applications widen the scope of the economy. We could think of medicine as an engine driving technological change. New applications might be possible because of secondary and tertiary benefits of certain drugs and therapies and there are interrelations to other sectors of the economy. Progress in medicine could transform the entire economy, leading towards a better economic performance. This consideration is clearly outside the scope of current health economics.
(H / 12) Institutions (Hospitals, Nursing Homes)
Institutions are central in Schumpeter’s work.
(J / 12) Evaluation of Life
Evaluation of life was too narrow a concept to Schumpeter.
(K / 12) Social Insurance
Depending on the cultural context, problems of social insurance can be very different, but the basic problems are the same. Schumpeter was interested in interrelationships in general and repercussions.
(L / 12) Policy and Future Issues
As Schumpeter has pointed out, dependent on the cultural context one cannot choose one and the same political program for every country. In practice, this means that 337
dependent on the cultural context different health policies have to be implemented by the World Health Organization.
14.3 Summary and Conclusions
By pursuing a thought to its origin “that which seemed dogmatic, objective, ideal or fixed” can be brought into motion. 24 Grimmer- Solem has compared the different sciences and found that “in the social sciences, and particularly in economics, this process is still in its infancy.” ( op. cit. , 2003, p. 1). For health economics, such an attempt has been made in this book. This defines one of the purposes of this study. In this chapter, the old perspective has been documented and related to what is available now.
A recurrent theme among the demand issues is the importance of social and economic conditions as determinants of health and through this of the demand for health care. Paracelsus points to the life threatening work conditions in the silver mines. Roscher has focused on unhealthy factory work and makes a pledge for factory inspectors. Oppenheimer witnessed the terrible housing and sanitary conditions as a major threat to health and saw the connection to unemployment. He advocated a return to the country side and agriculture. Schumpeter explained how structural economic decline can undermine the psychic health of the polulations dependent of the declining industry.
Prevention is a second thread of thought. Justi and other Cameralists proposed a broad policy, ranging from agricultural development to improving provision with food and sanitary measures. Wagner predicted that prevention would be of increasing importance in the future and involve a larger role for the state. Althoff provided a practical example. His policy in health care research was geared to prevention by eliminating infectious diseases, such as tuberculosis.
The impact of living conditions and prevention belong both to the fringe of modern health economics, but in a far less specialized age the perspective of the historical authors was broader. Through their efforts, Paracelsus, Wolff, and the Cameralists tried to improve the science of medicine. Althoff promoted research and looked for talents to help reach his goal. By changing university structures, he wanted to achieve excellence. His idea was that excellent researchers were better able to achieve progress, not only with respect to prevention, but also with respect to social, cultural, economic, and scientific goals, for instance functional architecture, efficient organizational structures, or the development of new products as a by-product of chemistry and physics. Wagner wanted the state to pay for state-of-the-art technology in order to promote better results.
24 Erik Grimmer-Solem. 2003. The Rise of Historical Economics and Social Reform in Germany 1864-1894. Oxford: Clarendon Press, p. 1. 338
In the discussions of supply side issues the authors show a keen eye for the absence of markets, and in addition to market imperfections, when early markets were present. Paracelsus did know from his own experience about supplier-induced demand and about the opportunities to exploit the patient for the benefit of the doctor and perhaps also for the benefit of the patient. Centuries later, Menger was much more critical about doctors who give in to the misplaced demands of patients who are in error. Another source of the absence of markets and market imperfection is lack of competition between suppliers of health care. The barriers to entry can be erected by the group of suppliers, such as the requirement to speak Latin, mentioned by Paracelsus; or barriers are erected with the support of the (local) public authority such as the legal monopolies or cartels for pharmacists. There was also discussion of policies against such medical market imperfections and about the proper role of public authorities with regard to the supply side. Public supervisory committees proposed by Justi should be of help in fighting malpractice by professionals who exploit the absence of markets or market imperfections. As Roscher pointed out there is no easy way out by opening the field for non-professionals, even if they have a good general education and perform well. Imperfect capital markets can be be another obstacle to development of medicine. In the nineteenth century, capital began to play a role at the supply side, in particular in pharmaceuticals. Wagner suggested that the state might come up with finance if capital does not come forward from the private sector due to underdeveloped capital markets. Althoff showed the way how the state can force development of medical technology through a well designed research policy - supported by state investments in research.
Absence of markets, market imperfections, and public intervention to counter them, had been part of the main repertoire of health economics from its beginnings on. This history emphasizes health economics before Arrow identified market imperfections.
Information problems can show up at the individual, group and national level. Paracelsus highlighted information asymmetries at the individual level of the patient and his doctor. At the group level lack of information can thwart actuarial calculations which are necessary to set efficient insurance premiums. Therefore Schmoller proposed insurance geared to small, homogenous groups expecting that for such groups it would be possible to build up the necessary information. Data gathering with respect to relevant health related issues at the collective level of the state was one of the concerns of the Cameralists. Two hundred years later Althoff improved and extended that type of collecting statistical information. He also did solve the information problem in searching for top research talent by building up and exploiting a network of experts in the field of science and medicine. In modern health economics, the notion of a fully-informed and price-taking consumer deciding upon what quantity of health care services to purchase has been modified in order to meet the characteristics of this field. (Compare Ellis, McGuire, 1993, op. cit. , p. 137). The issues that have been described under the category of information are diverse and more complex than what we typically discuss in modern health economics.
The category ‘optimal contract’ in the matrix concerns the discussions of incentive 339
structures leading to efficient behaviour. They are quite diverse. Paracelsus demanded that there should be patents for medicine and copyrights for medical authors. In today’s textbooks such property rights are presented as incentives to innovation by enabling the innovator to appropriate the market value of his creation. What for Paracelsus mattered in the first place was the recognition for the innovator and even more the guarantee of authenticity and quality of the product. Wolff described the house as an integrated production and consumption unit which can largely support itself. The demarcation between the houses and public institutions creates on the one hand incentives that discourage free riding on public services, on the other hand the demarcation also implies incentives for the house to rely on the market for medical relief only when incapable to help itself. By offering opportunity and finance, Althoff’s policy created incentives for institutes involved in research and for ambitious individual researchers to undertake pathbreaking research. Incentives are discussed here in a context quite different from the analysis of incentive structures in modern health economics.
In Paracelsus’ time health care insurance did not exist and from his own experience he knew that poor patients had not the means to pay the doctor. As a solution he proposed that the doctor should treat the poor free of charge. Those who could afford to pay more should contribute more according to the value they ascribed to health care services. It was not Paracelsus’ intention that the doctor was entitled to cross subsidize the treatment of the poor by charging higher prices to his well-to-do patients. Health policy as a means of redistribution is a more recent idea.
The roots of early life insurance went back into the time of Paracelsus, but local accident and health insurances in the form of mutual funds for people connected by profession, trade union or otherwise developed much later during the nineteenth century. Schmoller, who was concerned with the development of markets, investigated actuarial principles of insurances. He saw that large parts of the working population remained without coverage and pointed to the necessity of intervention of the state, in particular by making catastrophic health insurance a legal obligation for wage dependent workers. His ideas on insurance are embedded in the system on social insurance, which he stood for.
Wagner predicted that the growing cultural complexity of society would require the state to play an increasingly large role, not only in financing the necessary investments, but also with respect to regulation. In particular, he predicted more preventive measures such as better quality of water, housing, working conditions, health and sanitary policies. Althoff showed how the state could speed up technical progress in medicine by entering in public-private partnership, funding basic research with the revenues from its commercial application through patents. How crucial basic research is as a source of inventions and their spin-off in innovation and economic development was brought to light by Schumpeter one hundred years ago. It suggests that one can investigate the potential of the medical sector and its basic research as an engine driving economic growth. It is a perspective quite different from the conventional focus of health economics on the economic expenditures of the medical sector. Baumol and Bowen divided the health care sector into a 340
technically advanced part, where private initiative can be found. Here, they see what Schumpeter described, but they also pointed towards another part of health care: when labor cannot be substituted by capital, they characterized it as a stagnating sector. This phenomenon can be observed in health care. For instance, long-term care of the elderly can be characterized as a stagnating sector.
Paracelsus frequently struggled with questions of the value of life and related to it, the value of medical art. He asked who can pay a physician, if life is so valuable. The Cameralists, Justi included, were among the first to view an improvement in the general health of the population as an increase in human capital, not only because of the higher productivity of healthy workers, but also because of other intangibles. In contrast to Adam Smith’ “wealth”, Justi was writing about “happiness of the states,” which requires both, a healthy and happy population as a prerequisite. Benefit analysis today is narrower, using wages or added value per worker for evaluating gains in person years. The Austrian concept of time preference, introduced by Eugen von Böhm-Bawerk, is also of importance for the evaluation of life.
The roots of social insurance go back to Wolff who identified the extended family as the basic provider of support for the member in need of help. Important is here the notion of subsidiarity: within the family those who are fit have the obligation to lend a helping hand. He viewed them as an institution of mutual support. Later, the role of reciprocity in networks of mutual exchange was made explicit in the work of Bücher. He basically viewed them as systems of exchange without the use of money. Hundred fifty years after Wolff in the nineteenth century Roscher still did see the family as the economic basic unit. However, he had an eye for the social context in which families live, in particular the social situation. Remember his suggestion to let the mentally ill within their families and place of residence and also his thoughts about the moral obligation of the well educated and capable citizen to serve the local community. In the early twentieth century Oppenheimer’s agricultural cooperatives were supposed to create not only a healthy physical and social environment for the workers and their families but also to provide support to its needy members in case of unemployment, illness, disability and old age: basically an integrated system of social security based on the same principles of cooperation as Wolff’s house.
Finally one should keep in mind that the first ideas on mandatory insurance against catastrophic risks of ill health that were brought forward in the nineteenth century by Wagner and von Schmoller reflect their awareness of a deep seated social problem of a national scale that had to be addressed. It was an alternative insurance based concept of the welfare state which has been replaced by the British concept of the welfare state (Beveridge report, “Full Employment for a Free Society”) almost throughout Europe.
The overview provided in this chapter underscores the thesis that the old health economics is different in perspective than what is currently available in the professional literature in health economics. This chapter contains only flashpoints of what is back in the dissertation, but serves the purpose: to show that the old perspective is much broader than what we have today. It was a far less specialized age, and to a large 341
part, it was concerned with the development of markets. It was concerned with how to make markets work, and thereby assigned a minimum role to the state.
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Harold R. C. Wright. 1995. “Wilhelm Roscher and English Christian social thought.” Wilhelm Roscher and the "Historical Method." Journal of Economic Studies . Vol. 22, pp. 149-158.
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15. Summary and Conclusions
In this book, the core ideas of famous social scientists and economists on health are explained, beginning with Paracelsus and ending with Schumpeter. In between are chapters on Wolff, Justi, Roscher, Menger, Schmoller, Bücher, Oppenheimer, and Althoff. The authors covered examined main aspects of the issues of health from an economic, social, and political point of view. From their analyses it follows that over the past centuries the field of health economics has developed different contours from how it looks today.
A history of the theoretical development of health economics cannot be a whig history written as if the current state of health economics were a necessary and logical outcome of work that had been done as far back as centuries ago (compare footnote 10, chapter 14). Recent years have seen a dynamic increase in the volume of publications in health economics. This has been largely fueled by increasing state involvement in the industry of health care. For instance, the nationalization of the British health care service brought with it to train civil servants in the area. Knowledge became more specialized and geared towards the new institutional arrangements and possibilities, but also restrictions and constraints for health care delivery and finance through regulation and specific policy making. In the process, chances are that ideas got lost, in particular if they are locked up in a foreign language. In this sense, this book makes health economic contributions available to the scholarly literature.
Those authors have been chosen whose contributions are classical and of lasting value, but which are not well known. Part of the reason why they are often overlooked is that they are often locked up in another language but English, the lingua franca these days. The scope, emphasis and focus of their work have been very different from what now passes as the mainstream of health economics. The earlier authors focus on cultural development and health, they rely on the principle of subsidiarity, and they prefer a moderate role of the public sector. Policy relevance of their studies is given in the time under consideration, but the hope clearly is that we also can learn from these authors today. Each major country has a health care crisis, and each case is different. What cannot be accomplished with this book is to provide a generic solution to these crises all at once. What, instead, can be provided is a set of pegs opening questions on how to approach these issues. We have gone back to those authors who raised the issue of health as a public policy problem explaining how they defined and analyzed the problem. After all, if one wants to fix a structure successfully, one has to understand the master-plan upon which the structure had been built in the first place.
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346
Appendix
Abstracts, Keywords, J.E.L codes
A History of German and Austrian EconomicThought on Health Issues
347
Chapter 2
Paracelsus, Theophrast von Hohenheim (1493-1541):
A Holistic Approach to Health Including the Social Scientific Point of View
Abstract
Paracelsus (1493-1541) renewed in a consistent and comprehensive manner the basis of medical theory of his time. He collected a vast amount of medical and empirical knowledge not only through the study of medicine, but also through observation, practical experience and contacts with barbers, healers, gypsies, and executioners practicing folk medicine. Today, his achievements in the areas of medicine, philosophy, linguistics, and theology are widely acknowledged. Many of the works by Paracelsus have been published posthumously. Only between 1549 and 1658, 175 editions appeared. The research by Karl Sudhoff, who edited fourteen volumes of his medical and philosophical work created a scientific basis for further investigation. For his social-political writings he is less well known, because this work has been found very late in order to be included in the complete Paracelsus edition. It contains his contributions to comprehensive health sciences and health economic aspects, which are the focus of this chapter.
Keywords
Health, Health Economics, Paracelsus, Theophrast von Hohenheim (1493-1541)
J.E.L. Codes
D13, H4, I1
348
Chapter 3
Christian Freiherr von Wolff (1679-1754):
The House as the Relevant Context of Health Provision
Abstract
Christian Freiherr von Wolff (1679-1754) was a scholar, who founded economics within his general system of natural law ( jus gentium ). From today's point of view his concept is challenging. For every aspect of life, his focus was on the household and not on the individuals. This is important, since much health related services can best be provided within the immediate vicinity of the person to be treated. Even today, many such services are provided by the family directly. Conversely, individuals' health often depends directly on the lifestyle of the family. Wolff also introduced the principle of subsidiarity. It is relevant in questions of occupational and environmental health that go beyond the control of individual households; there is a case of application when young people make provisions for old age; and it became an important principle in the health care policy of the European Union.
Keywords
Health, Health Economics, House, Principle of Subsidiarity, Christian (Freiherr von) Wolff (1679-1754).
J.E.L. Codes
D13, H4, I1
349
Chapter 4
Johann Heinrich Gottlob von Justi (1717 - 1771):
Health as Part of a State's Capital Endowment
Abstract
In this chapter, the contributions of the Cameralists are investigated, in particular those of Justi (1717 - 1771), to the understanding of what later was to become health economics. After the disastrous events of the Thirty Years' War (1618 - 1648), human capital mattered. Hence, Cameralism emerged as a science of economic policy, which was directed towards economic development. It was not incompatible with intellectual developments elsewhere, notably in France, but yet totally different in its emphasis on economic development and the human factor in production. The most prolific writer of the Cameralists, who fully developed the science, was Johann Heinrich Gottlob von Justi. To him not only the quantity, but also the quality of the population mattered. Since health has an influence on both, he elaborated policy measures that would improve the health of the population in order to make economic development possible and to sustain further growth. Justi proposed incentives that would stimulate agriculture and thus encourage an improvement of the nourishment of the population in order to enhance health; he came forward with ideas how to raise the quality of health care and proposed the introduction of a supervisory board for health care provision; and he was concerned with the health of soldiers. As was common in Cameralism, Justi considered people the wealth of the nation. Health is therefore a matter of investment, not consumption; the healthier the population, the higher the wealth of the population.
Keywords
Cameralism, health, healthcare, Johann Heinrich Gottlob von Justi (1717 - 1771).
J.E.L. Codes
B1, B3, B21, I10, P13
350
Chapter 5
Wilhelm Roscher’s (1817-1894)
Historic Method and Health Issues
Abstract
Wilhelm Roscher (1817-1894) has introduced the historic method to economics. He used an eclectic, descriptive approach in order to describe the evolutionary laws governing the development of the economy of a nation. A nation is characterized by its law, the state, and the economy, but also by religion, language, art, and science. Roscher concentrated on the first three factors of influence in order to explain the political economy of a nation. In line with Aristotle, he saw the family unit as the beginning of any nation's economy, and not the individual. In his work, we find important tenets for health economics. Roscher proposed the institution of social welfare services as well as public regulation to protect vulnerable groups in society, such as wage laborers, women, and children. He was a fervent advocate of the introduction of factory inspectors. In the Kingdom of Saxony, he was politically active in the implementation of his policy proposals. From today's point of view, his contribution lies in building institutions for health care services and in his reflections on what could be called, parallel to constitutional public finance, constitutional health economics.
Keywords
Health, Health Economics, Public Regulation, Wilhelm Roscher (1817-1894), Social Welfare Services.
J.E.L. Codes
D13, H4, I1
351
Chapter 6
Adolph Wagner (1835-1917):
The Increasing Role of the State in Health Care
Abstract
Adolph Wagner (1835-1917), the public finance theorist and advocate, was interested in the limits of the state as a part of the economy. His prediction of the likely long-term development of the tasks of the state is known as Wagner's Law . He showed that with an advance in the culture of a society the tasks of the state will grow in the long run. Wagner has formulated the conditions under which the state can and should intervene in the economic process and thus created a basis for legislation. He foresaw a role of the state with respect to health care, which will be the focus of this chapter. In the introduction, Wagner's work will be put in context by providing a short biography. Section 5.2 focuses on Wagner's Law , and an application to health care follows in the next section (5.3). When Wagner formulated his law, capital markets have not yet emerged and institutions were not fully developed. In order to show the relevance of Wagner's Law today, aspects of both, the presence of capital markets and modern institutions, will be discussed in section 5.3 and 5.4. The chapter ends with a summary and conclusions (5.5).
Keywords
Baumol-Bowen Hypothesis , evolution, health economics, Adolph Wagner (1835-1917) , Wagner's Law .
J.E.L Codes
B1, B3, B21, I10, P13
352
Chapter 7
Carl Menger (1840-1921):
Perceptions of Health in the Economy
Abstract
This chapter is devoted to discussing Carl Menger's (1840 - 1921) contributions to health economics. The founder of the Austrian School of economics saw the importance of health as a factor contributing to the development of a nation, which is brought about by individual planning and provision for the future. His contributions are contained in his major work of 1868, Grundsätze der Volkswirtschaftslehre (Principles of Economics), the point of departure of Austrian Economics. His successors, Friedrich Freiherr von Wieser (1851-1926) and Eugen von Böhm-Bawerk (1851-1914), further developed Menger's thought and established the reputation of the Austrian school of economics. The major cornerstones of Austrian economics are methodological individualism, methodological subjectivism, and an emphasis on time. The focus here lies on Menger's contributions, because with respect to health economics, his successors did not develop his ideas much further. In order to put Menger's contributions to health economics in context, a short biographical sketch is given in the introduction. In section 6.2, a selection of Carl Menger's remarks on health issues follows, in particular his discussion of individual provisions made for the future. The idea of a subjective discount rate has found entry into modern health economics as will be illustrated in the discussion presented in section 6.3. The chapter ends with a summary and conclusions.
Keywords
Austrian approach to economics, Eugen von Böhm-Bawerk (1851-1914), human capital, lifestyle, Carl Menger (1840-1921), public health policy, subjective discount rate, Friedrich Freiherr von Wieser (1851-1926).
JEL codes
B00, B19, H10, H30, I10, I18
353
Chapter 8
Gustav von Schmoller (1838 - 1917):
Health Issues as Part of the larger Social Question
Abstract
In the nineteenth century issues of health and health care have been discussed from an economic perspective, especially by the German Historical School as exemplified by the contributions of Gustav Schmoller (1838 -1917). Schmoller treated health issues as part of the larger Social Question which had arisen when during Germany's industrial revolution farmers and workers had moved from the country to the cities to find employment in the new established and expanding factories. A proletarian class formed and dissatisfaction was high. The Social Question was a main concern to Schmoller. He had the idea to insure the major risks in workers lives. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop. Hereby, he considered health a central variable which had an influence in his proposals for economic policy. Schmoller created the scientific basis for the German welfare legislation in the 1880ies. To this effect, he organized a professional think tank of his colleagues, the Verein für Socialpolitik . In this chapter, the focus is on health aspects in Schmoller's work.
Keywords
Health, Healthcare, Insurance, Gustav von Schmoller (1838 - 1917) , the Social Question . J.E.L. Codes
B1, B3, B21, I10, P13
354
Chapter 9
Karl Bücher (1847-1930):
The Role of Nonmarket Exchange in Health and Health Care
Abstract
Karl Bücher (1847 - 1930), a historically working economic theoretician, has emphasized economic exchange before the advent of markets. In contrast to the classical economists, of whom he was critical for focusing on market exchange processes, Bücher has considered mainly that part of economic behavior which constitutes exchange without a market. As he has noted, nonmarket economic behavior accounted for a large part of the economy in its earlier stage of development. His illustration of nonmarket behavior includes such phenomena as the gift relationship, borrowing and lending of goods and services, and labor provided in exchange for future help. These kinds of nonmarket exchange are characterized by a give-and-take relationship and should therefore be distinguished from actions born out of altruism. In line with von Thünen's and Gossen's work, Bücher held that nonmarket economic behavior is grounded in the principle of marginal utility. His observations and interpretation of nonmarket exchange are included in this book because of the relevance of nonmarket arrangements in health care. The issue of nonmarket exchange in health care has become all the more important with the gradual collectivization of this sector.
Keywords
Bücher, charity, exchange, gift relationship, health, healthcare, labor, nonmarket economics, rent-seeking, social norms.
J.E.L. Codes
B1, B3, B21, I10, P13
355
Chapter 10
Friedrich Althoff's (1839-1908)
Entrepreneurial Approach to Health Related Sciences and Scholarship
Abstract
Friedrich Althoff (1839-1908), the leading Prussian administrator in the Ministry of Culture and Science for more than a quarter of a century, created incentive compatible structures in which science and scholarship could thrive. The so-called Althoff System refers to the systematic approach standing behind Althoff's science policy. This had an effect on all sciences, but here, we will concentrate on the implications for medicine and public health. At the time, the industrial development had significant effects in relation to disease. For instance, new diseases emerged among the proletarian class of the cities, and this required new ways to view and treat these diseases. Althoff took patronage of medical research by supporting scholars with maverick ideas. He founded institutes and hospitals to further experimental and diagnostic research. Under Althoff, Germany introduced public health legislation, as in the case of combating tuberculosis. An increase in speed of scientific progress in the field of medicine, as well as other fields could be shown during and shortly after the era Althoff. The relevance of the Althoff System concerns the organization of scholarship in general and in this sense of health issues in particular.
Keywords
Friedrich Althoff (1839-1908), Medical Research, Mortality of Newborns, Science and Scholarship, Tuberculosis.
J.E.L. Codes I, P, H10, H30, Q
356
Chapter 11
Franz Oppenheimer's (1864-1943)
Social Economic Approach to Health
Abstract
Franz Oppenheimer (1864-1943), the physician who later turned to economics and the social sciences, saw the root of illness and epidemics in poor social and economic circumstances. He identified overcrowding, poor food, exposure to cold and damp, prolonged and exhausting work, and unhealthy occupations as factors that lower the resistance to disease and make people prone to illness and early death. Oppenheimer widened his scope and studied what he called "social illness." He proposed the agricultural cooperatives ( Siedlungsgenossenschaften ) as the basis for a healthy life. While health economics is typically done in terms of looking at the specific health conditions, institutions, and costs, Oppenheimer looked at the social and economic conditions, which gave rise to poor or better health. In this sense, he is a meta health economist.
Keywords
Franz Oppenheimer (1864-1943), cooperative agricultural settlement, morbidity and mortality, Social Question .
J. E. L. Codes B, A, H
357
Chapter 12
Joseph Schumpeter's (1883-1950)
Broader Picture and Health Issues
Abstract
Can one and the same theory explain both, economic development on the one hand and societal consequences of economic development on the other? Joseph A. Schumpeter (1883 - 1950) provided an answer to this question in the seventh chapter, "The Economy as a Whole," of Theorie der wirtschaftlichen Entwicklung [The Theory of Economic Development] , published in 1912. (Leipzig: Duncker & Humblot.) This part of his work appears only in the first edition and has been omitted from later editions, as well as the 1934 English translation.
In the omitted chapter, Schumpeter entertained the vision that innovation takes place in institutions and organizational structures, and because of the interrelationships between the different sectors not only affects the entire economy, but promotes the evolution of society as a whole. The key concept of his theory is "the entrepreneur," that is the agent, who has the capability to innovate and is willing to face and accept the possibility of failure. In the seventh chapter, Schumpeter discussed the repercussions of innovation outside the sectors, where the entrepreneurial initiative was taken, thereby also looking at the downside of economic development. Schumpeter was also interested in how sectors other than the economy proper provide a fertile "playground" for entrepreneurial talent that can end up in economic affairs.
He tried to cover the interrelationships between the different sectors of the economy as the entrepreneurial initiative, but also the failed innovations, reverberate through all the sectors. Health issues are an example of phenomena which belong to all sectors at the same time. For this reason we see Schumpeter as an economist whose writings on economic, institutional and social development are relevant for health economics. We conceive of the discipline not as narrow, but as a broader social science based enterprise in scholarship.
Keywords
Economic Development, Entrepreneurship, Health, Joseph A. Schumpeter (1883 - 1950), Societal Consequences of Economic Development.
J.E.L. Codes
B1, B3, B21, I10, P13.
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List of Illustrations
Althoff: http://www.brandenburg-preussen-museum.de/index.php?page_id=47&x_content=258,16
Brandenburg-Preußen Museum Wustrau Inhaber Ehrhardt Bödecker Eichenallee 7A 16818 Wustrau Telefon: (03 39 25) 70798 Telefax: (03 39 25) 70799 © Brandenburg-Preußen Museum Wustrau 2004-2006
Bücher: http://www.ifkw.lmu.de/ifkw-80/bilder/06_buecher.jpg
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Menger: http://www.econ.duke.edu/Economists/Gifs/Menger.gif
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Oppenheimer: http://de.wikipedia.org/wiki/Bild:Franz_Oppenheimer.jpg
Wikimedia® is a registered trademark of the Wikimedia Foundation, Inc. This page was last modified 17:45, 16 July 2007.
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Roscher: http://www.econ.duke.edu/Economists/Gifs/Roscher.gif
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Schmoller: http://www.econ.duke.edu/Economists/Gifs/Schmoller.gif
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Schumpeter: http://www.lancs.ac.uk/staff/ecagrs/gallery.htm
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Wagner: http://www.econ.duke.edu/Economists/Gifs/Wagner.gif
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Biography
Ursula M. Backhaus received her education at the Universities of Constance (Diplom-Volkswirt, 1979) and Auburn (Master of Science in Economics, 1983). As a forecasting analyst of a leading manufacturer of agricultural implements, she specialized in empirical applied econometrics and agricultural economics. In 1987, she became a fellow in health economics at the School of Health Sciences at Maastricht University. Since 1992, she has been a research associate at the IssF Foundation and has published mainly in the areas of location theory and the history of health economics. She translated Schumpeter's seventh chapter, "`The Economy as a Whole': Seventh Chapter The Theory of Economic Development . Joseph A. Schumpeter." Her dissertation presented to the Faculty of Law at the University of Groningen is a history of early ideas in health economics.
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Acknowledgements
The idea of this book was conceived in 1992, when I met professor Andries Nentjes for the first time at the main station in Utrecht. He became my dissertation supervisor. Due to his tireless efforts and the critical questions of the committee members, the dissertation could be completed. I should like to thank professors Nentjes, Couwenberg, Maks, and Zuidema who all contributed to improve the work.
The main impetus was received by the annual Heilbronn Conferences, which offered a regular forum for presenting and discussing the draft versions of most of the chapters. Various participants of the Heilbronn Conferences offered comments, and I should like to thank all of them, in particular Gerrit Meijer, Peter Senn, and Alexander Viskovatoff, who read and improved some of the chapters of the book.
Closer to home, there is my husband Jürgen who has been an indispensable and patient helper over the years. When we celebrated our silver wedding the book was ready, marking a period of our life together. Our children Carl Malwin and Winifried also helped along the way. Carl Malwin provided computer solutions and Winifried helped with the illustrations of the book.
Of course, all remaining errors and infelicities are my own.
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