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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
Beoordelingscommissie :
:
Prof. dr. A. Nentjes
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
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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
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Anthony J. Culyer. 2005. The Dictionary of Health Economics. Edward Elgar.
Cheltenham, UK, p. 150.
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.
Nevertheless, this is the economic approach by Mark Blaug. 1985. (4) Economic
Theory in Retrospect. Cambridge: Cambridge University Press.
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
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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
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6
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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
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.
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.
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.
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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
Europe.
Paracelsus (1493-1541) tried to find
solutions.
After the Thirty Years’ War (1618-1648)
Cameralism emerged. Cameralism
became a university science in 1727 at
the Prussian Universities of Halle and
Frankfurt on the Oder.
The desperately bad health states of
the populations after the Thirty Years’
War led the Cameralists to propose
early health policy measures. Wolff
(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
more people into the labor force for
longer hours than farm labor required.
Women and children were also
recruited.
Roscher (1817-1894) identified the
health related problems and looked for
guidelines to protect the working
population.
13
Medium industrialization and
agglomeration coupled with the
depopulation of the land produce
desparate sanitary and health
conditions.
Cultural and industrial development led
to a new post-feudal upper class with
new attitudes and diseases.
Wagner (1835-1917) defined an entire
catalogue of new tasks of the state
emphasizing cultural and technological
progress.
Rapid industrialization produced deep
crises with massive insecurity, often
involving poverty and infirmity of large
segments of a mostly urban population.
In this period the threat of a class-war
was imminent. It is referred to as the
First Founders’ Crisis.
Schmoller (1838-1917) 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. Loss of the work place is
not yet compensated for.
The social welfare state is still in an
early stage of development and
insufficiencies are gaping wide open.
Bücher (1847-1930) emphasized nonmarket, but exchange-based
relationships to supplement state
provision and market exchange.
As Schmoller had diagnosed, urban
agglomeration produced significant
debasement of health.
Althoff (1839-1908) designed and
implemented structures for the
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
the late 19th and early 20th century led
to the economic downfall of large
segments of the population, both urban
and rural.
Oppenheimer (1864-1943) defined
economics as social medicine. He
emphasized cooperative forms of living
and working in order to alleviate
conditions leading to poverty and poor
health.
Menger (1840-1921) explored issues of
perception and education as
determinants of better health.
Schumpeter (1883-1950) emphasized
in his early writings the social
consequences of boom and bust in their
many social repercussions, including
health.
14
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 recordkeeping. 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
9
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.
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
10
11
12
13
19th Century). Halle.
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.
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.
An example is the health insurance proposal by Krug, analyzed by Winfried
Schmähl. 1997. “Avoiding Poverty in Old Age by an Obligatory ContributionFinanced 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.
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
16
17
Ursula Backhaus. 2005. "Austrian Aspects to Health Economics." Modern
Applications of Austrian Thought. London: Routledge, pp. 175-194.
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.
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
18
19
20
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
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.
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.
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 (18391908) 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
22
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.
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
24
25
Franz Oppenheimer. 1896, 1922(3) Die Siedlungsgenossenschaft. (The
Cooperative Settlement for Development). Jena: Fischer.
Rudolf Goldscheid. 1908. Entwicklungswerttheorie, Entwicklungsökonomie,
Menschenökonomie. (Value Theory of Development, Economics of
Development, Economics of the Human Being). Leipzig: Werner Klinkhardt.
“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
27
28
29
30
31
Anthony J. Culyer and Joseph P. Newhouse. Editors. 2000. Handbook in Health
Economics. Amsterdam: North-Holland.
Friedrich Breyer, Peter Zweifel. 1992. Gesundheitsoekonomie. (Health
Economics). Berlin: Springer.
Victor R. Fuchs. 1986. The Health Economy. Cambridge, Massachusetts:
Harvard University Press.
Sherman Folland, Allen C. Goodman and Miron Stano. 2001 (3). The
Economics of Health and Health Care. Upper Saddle River: Prentice Hall.
Thomas E. Getzen. 1997. Health Economics: Fundamentals and Flow of Funds.
New York: John Wiley & Sons, Inc.
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 (14931541), 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
2
3
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.
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.
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
5
6
"Paracelsus." 19232. The New International Encyclopaedia. Vol. XYIII. New
York: Dodd, Mead and Company.
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.
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
8
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.
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 (15791644), 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
10
11
12
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.
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.
Compare Burton A. Weisbrod. 1983. Economics and Medical Research.
Washington and London: American Enterprise Institute for Public Policy
Research.
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
13
14
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.
Paracelsus. 1952, op. cit., p. 118. Tanslation of the quote by Johannes Hanel,
1995, op. cit., p. 3.
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
16
17
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)
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).
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
20
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.
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
22
23
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.
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).
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
24
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.
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.
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
28
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.
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
29
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).
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 selfinterest 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
31
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.
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
33
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.
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 rentseeking.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, rentseeking 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
34
35
Reuben A. Kessel. Chicago and London: The University of Chicago Press, pp.
37-53, p. 37.
Gordon Tullock. 1967. "The Welfare Costs of Monopolies, Tariffs and Theft."
Western Economic Journal. 5.3, pp. 224-232.
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
m
p
N
C
p*
D
q
0
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 qm. The number of
physicians, qm, is smaller than that of a competitive market, q*, and the price
charged, pm, 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 (qm), 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 pmMNp* 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
39
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.
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 rentseeking 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 rentseeking 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
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52
53
54
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
2
3
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.
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.
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
5
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.
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
7
8
9
10
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.
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.
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.
Gustav Schmoller. 1923 (2). Grundriß der allgemeinen Volkswirtschaftslehre I.
Munich/Leipzig: Duncker & Humblot, page 83.
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
12
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.
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
14
15
16
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.
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.
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.
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
17
18
19
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.
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.
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.
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
20
21
22
denselben verbunden sind." Par. 160-182, "Das sechste Hauptstück. Von den
Pflichten gegen Gott."
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.
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.
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
24
25
Kanamori, Shigenari. 1997. "Christian Wolff's Speech on ConfucianismConfucius as Compared with Wolff. European Journal of Law and Economics. 4,
pp. 299-304, p. 302.
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.
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
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.
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 socialeconomic 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
27
28
The share of human capital produced in the household will rise, the cheaper the
price of articles of mass production will get.
Jürgen Backhaus. 1989. Die Finanzierung des Wohlfahrtsstaats. Eine kleine
Ortsbestimmung an Hand der Theoriegeschichte. (Financing the Welfare State).
Inaugural Lecture, Maastricht, p. 6, 7.
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
29
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.
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.
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
32
33
34
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.
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.
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.
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
37
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.
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
39
40
41
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.
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.
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.
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
43
44
45
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.
Inaugural lecture by Arno Scherzberg, University of Erfurt, 7-9-2002.
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.
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 sociopolitical 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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Ortsbestimmung an Hand der Theoriegeschichte. (Financing the Welfare State. A
History of Economic Thought Approach). Inaugural Lecture, University of Limburg, 1010-1989.
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
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Discussion paper No. Wp/95/004, University of Limburg, pp. 7-43.
Backhaus, Ursula. 1997. Book Review: "John R. Wolfe. 1993. The Coming Health
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Backhaus, Ursula. 2001. Book review: "Posner, Richard A. 1995. Aging and Old Age.
Chicago and London: The University of Chicago Press." Business Library Review
73
International. Vol. 24, (3), pp. 215-225.
Blickle, Peter. 2000. Kommunalismus. Skizzen einer gesellschaftlichen
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Drechsler, Wolfgang. 1997. "Christian Wolff (1679-1754). A Biographical Essay."
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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.
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Frey, Bruno S. and Eichenberger, Reiner. 1999. The New Democratic Federalism for
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Friedman, Milton. 1953. "The Methodology of Positive Economics." In: Essays in
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Kanamori, Shigenari. 1997. "Christian Wolff's Speech on Concucianism-Confucious as
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Kimminich, Otto. Editor. 1981. Subsidiarität und Demokratie. (Subsidiarity and
Democracy). Düsseldorf: Patmos Verlag.
Kuyper, Abraham. 1880. "Sphere Sovereignty." Reprinted in Bratt, James D. Editor.
1998. Abraham Kuyper. A Centennial Reader. Grand Rapids, Michigan: Wm. B.
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Scherzberg, Arno. 7-9-2002. Inaugural Lecture, University of Erfurt.
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Schmoller, Gustav. 1923 (2). Grundriß der allgemeinen Volkswirtschaftslehre I.
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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.
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Hildesheim, New York: Olms.
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75
76
Chapter 4
Johann Heinrich Gottlob von Justi (1717 - 1771):
Health as Part of a State's Capital Endowment
Contents
4.1
Introduction
-
4.2
People, the Wealth of the State
-
4.3
The Impact of the Thirty Years' War
Distinctive Feature of Cameralism: the Concern with the Police Function
Health Related Thought in Cameralism
Major Population-Based Measures
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
2
Lippert. 1900 (2). "Justi, Johann Heinrich Gottlob von." Handwörterbuch der
Staatswissenschaften. (Encyclopedia of the State Sciences). Vol. 4. Jena:
Gustav Fischer, pp. 1419-1420.
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
4
5
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.
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.
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
7
8
9
Jürgen Backhaus and Richard E. Wagner. 1987. "The cameralists: A public
choice perspective." Public Choice. 53, pp. 3-20, p. 6.
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.
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.
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
11
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.
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
13
14
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.
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.
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.15Two 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
16
17
18
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.
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.
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.
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
20
21
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.
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.
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
23
24
25
Lippert. 1900 (2). "Justi, Johann Heinrich Gottlob von." Handwörterbuch der
Staatswissenschaften. Vol. 4. Jena: Gustav Fischer, pp. 1419-1420.
Karl Pribram. 1923. A History of Economic Reasoning. Baltimore: The Johns
Hopkins University Press, p. 95.
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.
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
27
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.
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
29
30
31
Gustav Schmoller. 1923. Grundriß der Allgemeinen Volkswirtschaftslehre. First
Part. (Blueprint, I). Munich, Leipzig: Duncker & Humbolt, p. 63.
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.
Thomas E. Getzen. 1997. Health Economics: Fundamentals and Flow of Funds.
New York: John Wiley & Sons, p. 309.
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
37
38
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.
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.
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.
39
40
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.
Justi v., 1760, op. cit. "Erster Abschnitt. Von denen Medicinal-Anstalten." (Part I.
On Medical Institutions), pp. 249-256.
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
42
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.
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 selfselection 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
43
44
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.
"Aufmerksamkeit auf die Pfuscher und Bestellung der Armen-Ärzte." Justi v.,
1760, op. cit., Paragraph 296.
"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
46
47
48
49
"Unterricht und Prüfung der Wundärzte und Hebammen." Justi v., 1760, op. cit.,
Paragraph 298.
"Unterricht, Prüfung und Visitationen in Ansehung der Apotheker und
Materialisten." Justi v., 1760, op. cit., Paragraph 299.
"Andere, der Gesundheit nachtheilige, Umstände." Justi v., 1760, op. cit.,
Paragraph 300.
"Von dem Selbstmord." (On suicide). Justi v., 1760, op. cit., Paragraph 301.
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
50
51
52
Policeywissenschaft. (Principles of Police Science). Frankfurt a. M.: Sauer &
Auvermann KG. Vorrede der ersten Ausgabe, p.*4.
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.
Johann Heinrich Gottlob von Justi. 1969, op. cit., Vorrede der ersten Ausgabe,
(Preface to the first edition), p. *5.
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
54
55
56
57
58
Mushkin, S. J. 1962. "Health as an Investment." Journal of Political Economy.
Vol. 70. Supplement, pp. 129.
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.
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.
Louise B. Russell. Editor. 1987 Evaluating Preventive Care: Report on a
Workshop. Washington, DC: Brookings Institution, p. 4.
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.
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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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.
(Basic Pillars of Power and Happiness of the States or Encompassing Representation
of the Entire Police Science. First Volume, which Presents an Encompassing
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(Blueprint, I). Munich, Leipzig: Duncker & Humblot.
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Wagner, Richard. "Cameralism." Maastricht Lectures in the History of Economic
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105
106
Chapter 5
Wilhelm Roscher’s (1817-1894)
Historic Method and Health Issues
Contents
5.1
Introduction
-
5.2
5.3
5.4
Wilhelm Roscher (1817-1894), his Life and Work
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
Public Regulations
-
Quality Controls of Commodities
-
Safety Regulations in Factories
-
Occupational Diseases
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
2
3
4
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.
Mark Perlman, Charles McCann. 1998. The Pillars of Economic Understanding.
Ann Arbor. The University of Michigan Press, p. 418.
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.
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
5
6
7
Wilhelm Roscher and the "Historical Method." Journal of Economic Studies. Vol.
22, pp. 53-105, p. 64.
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.
For his other writings also compare the entry on Roscher in the Handwörterbuch
der Staatswissenschaften, op. cit., p. 464-465.
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
9
10
11
12
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 (18171894). A Centenary Reappraisal.
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.
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).
1896, Dresden: v. Zahn & Jaensch.
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
14
Nicolas Balabkins. 1988. Not by Theory alone... The Economics of Gustav von
Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, p. 25.
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
16
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).
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
18
19
Wilhelm Roscher. 2002. Über die Spuren der historischen Lehre bei den älteren
Sophisten (1838). Marburg: Metropolis, p. 73.
Adam Smith. 1790. The Theory of Moral Sentiments. 1982 (6). D. D. Raphael
and A. L. Macfie. Editors. Indianapolis: Libery Press.
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
21
Perlman, Mark and McCann, Charles. 1998. The Pillars of Economic
Understanding. Ideas and Traditions. Ann Arbor. The University of Michigan
Press, p. 417.
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
23
24
25
26
For the causes of poverty compare paragraph 2 in Wilhelm Roscher. 19063.
System der Armenpflege und Armenpolitik. (System of Poverty Care and
Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung Nachfolger,
p. 4.
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, 19063. 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).
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.
An example is the case of the German Democratic Republic, where,
handicapped people were not allowed to become teachers.
Jerrold E. Levy. 19953. "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, 19063, (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 lightmindedly, 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 (19063, 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 (19063, 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."19063, 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. (19063, 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 (19063, 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 (19063, 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
29
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. 289318.
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
31
32
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.
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.
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.
33
34
bewährt.(12)" Roscher, 1913, op. cit., p. 328.
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.
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 companybased 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 health120
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. 19063. 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 (19063, 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
37
38
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.
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.
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 wellknown 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
40
41
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.
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.
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
Backhaus, Jürgen and Hansen, Reginald. 2000. "Methodenstreit in der
Nationalökonomie." (Methodenstreit in Economics) Journal for General Philosophy of
Science. Vol. 31, pp. 307-336.
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.
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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. 19953. "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. 19063. 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 ContributionFinanced 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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Macfie, A. L. Editors. Indianapolis: Libery Press.
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).
127
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 Grundlegung1 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 religiousphilosophical 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
2
3
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.
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.
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
5
6
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.
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.
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
8
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.
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. 173201.
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
10
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.
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
12
13
Compare his more refined formulation of 1892. Adolph Wagner. Grundlegung.
(Foundations), a part of Lehr- und Handbuch der politischen Oekonomie (Textand Handbook of Political Economy). Leipzig und Heidelberg. C.F. Winter'sche
Verlagshandlung. Paragraph 358.
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. 1316.
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
14
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.
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.
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. Welleducated 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
17
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.
In the original, the quote reads as follows: "... der Staat hat diejenigen
Tätigkeiten zur Befriedigung der Bedürfnisse seiner Angehörigen zu
übernehmen, welcher weder die Privatwirthschaften, noch freie, noch andere
Zwangsgemeinwirthschaften (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).
18
alle diese nur weniger gut oder nur kostspieliger ausüben können." Wagner, op.
cit., 1892, Paragraph 377.
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
20
21
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.
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.
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
23
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 gametheoretic) 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.
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 wellmeaning 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 healthrelated 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
24
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.
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
26
27
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.
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.
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
29
30
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.
Compare David Ricardo. 1817. (1949). Principles of Political Economy and
Taxation. London.
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
33
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.
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
35
36
William A. Niskanen, Jr. 1971. Bureaucracy and Representative Government.
Chicago: Aldine Publishing Company.
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.
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. 438448.
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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150
151
152
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
2
3
4
Carl Menger. 1871 (2). Grundsätze der Volkswirtschaftslehre. Volumes I-IV.
Friedrich A. Hayek. Editor. Tübingen: Mohr Siebeck. 1868, first edition.
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.
Compare chapter 4, this volume.
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
6
7
Erich Streissler and Monika Streissler. Editors. 1994. Carl Menger's Lectures to
Crown Prince Rudolph of Austria. Aldershot: Edward Elgar.
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.
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
9
10
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.
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.
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
13
14
15
Steven Horwitz. 1994. "Subjectivism." The Elgar Companion to Austrian
Economics. Peter J. Boettke. Editor. Aldershot: Edward Elgar, pp. 17-29, p. 18.
For further elaboration, compare Ingo Pellengahr. 1995. The Austrian
Subjectivist Theory of Interest. Frankfurt: Peter Lang.
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.
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, BöhmBawerk, 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 highstanding 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
17
Menger used the term "Verkehr" when he referred to the market. 1871, op. cit.,
p. 16.
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
19
20
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.
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).
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. BöhmBawerk 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.
21
22
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.
Friedrich A. von Hayek. 1968. "The Austrian School." International Encyclopedia
of the Social Sciences. 4, pp. 458-462.
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, BöhmBawerk 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
24
Interest. I. History and Criticism of Theories of Interest.) Jena: Gustav Fischer, p.
268.
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
26
27
28
29
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 18901918. A Psychobiographical Study. Lexington, Kentucky: The University Press
of Kentucky.
Jürgen Backhaus. 1979. Ökonomik der partizipativen Unternehmung. (The
Economics of the Participative Firm). Tübingen: Mohr (Siebeck), p. 51.
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.
James Buchanan. 1966. Cost and Choice. Chicago: Markham.
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 smokingrelated 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
30
31
32
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.
Walter Adams, James Brock. 1999. The Tobacco Wars. Cincinnati, Ohio: SouthWestern College Publishing, p. 54.
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.
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
34
35
Gary S. Becker and Kevin M. Murphy. 1988. "A Theory of Rational Addiction,"
96, Journal of Political Economy, pp. 675-700.
Gary S. Becker. 1964; 1975 (2). Human Capital. New York: Columbia University
Press.
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 onthe-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
37
38
This is different in the case of an apprenticeship, which will lead to a high
qualification of the employee.
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.
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 lastperiod 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 lifethreatening 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
41
42
Moore, M. J. and Viscusi, W. K. 1988. "The Quantity-adjusted Value of Life."
Economic Inquiry, 26, pp. 369-388.
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.
"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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43
These views on Lebenslagen are exactly the same as those which informed the
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175
176
Chapter 8
Gustav von Schmoller (1838 - 1917):
Health Issues as Part of the larger Social Question
Contents
8.1
Introduction
-
8.2
Gustav (von, 1908) Schmoller: his Life and Work
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
2
3
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.
Nicolas Balabkins. 1988. Not by Theory alone... The Economics of Gustav von
Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, p. 11.
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
5
6
7
8
Zur Geschichte des deutschen Kleingewerbes im 19. Jahrhundert. Halle 1870.
Gustav Schmoller. 1864/65. "Die Arbeiterfrage." Preußische Jahrbücher. Berlin.
Vol. XIV, pp. 393-424, and Vol. XV, pp. 32-64.
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.
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.
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
9
10
11
12
Adolph Wagner Reconsidered. Marburg: Metropolis-Verlag, pp. 289-318, see in
particular p. 291.
Gustav Schmoller, 1923 (second edition). Grundriß der Allgemeinen
Volkswirtschaftslehre. Two volumes. (Blueprint I and II). Munich, Leipzig:
Duncker & Humblot.
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.
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.
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
14
15
16
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.
Harry W. Laidler. 1927. A History of Socialist Thought. New York: Thomas Y.
Crowell Company, p. 670.
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 2336, 2002. Publication forthcoming.
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 selfconfidence 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
17
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.
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.
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 20Schmoller'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
20
21
22
O'Brien, 1987, op. cit., p. 62. (Translation of a letter written by Schmoller in St.
Blasien, September 16, 1898).
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).
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.
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
24
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.
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
27
28
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.
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.
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
32
33
Der "Akkord- oder Stücklohn" entstand dort, "wo die Arbeiter nicht
Familiengenossen des Herrn" waren. Schmoller, Blueprint, II, op. cit., 1923, p.
324.
Alchian, Armen A., and Harold Demsetz. 1972. "Production, Information Costs,
and Economic Organization." American Economic Review, 62, no. 5: 777-95.
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
36
37
38
According to Schmoller, radical socialists had a preference for institutionalized
care, because it allowed forced reeducation. Schmoller, Blueprint, II, 1923, op.
cit.,p. 381.
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.
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.
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
39
40
41
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.
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.
Only extreme liberals declared any public help to the poor as wrong. Schmoller,
Blueprint, II, 1923, op. cit., p. 344.
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
43
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.
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
45
46
47
48
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.
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.
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.
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.
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
50
51
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.
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.
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
53
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.
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
55
56
57
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.
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.
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.
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
59
60
61
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.
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.
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.
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
63
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.
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
65
66
67
68
69
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.
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.
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.
In the original German, this reads: "Je kleiner die Kassen, desto größer die
Ausgaben." Schmoller, Blueprint, II, 1923, op. cit., p. 419.
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.
"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,
96,97,98
Urban Housing
70
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.
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
3, 4
Young working girls in Munich 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
72
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.
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 farsighted 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
74
75
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.
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.
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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209
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 KonversationsLexikon 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
2
3
4
A particular outgrowth of this literature is the work of the Tidmus School at York
University.
Karl Polanyi. 1968. "Bücher, Karl." International Encyclopedia of the Social
Sciences, pp. 163-165.
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.
Karl Bücher. 1922. Die Entstehung der Volkswirtschaft. Volumes I and II.
Tübingen: Laupp'sche Buchhandlung; 1922. Beiträge zur Wirtschaftsgeschichte.
II. Tübingen: Laupp'sche Buchhandlung. 19195. 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
6
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.
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
8
Chapter 1, "Schenkung, Leihe und Bittarbeit." Karl Bücher. 1922. Die
Entstehung der Volkswirtschaft. II. Tübingen: Laupp'sche Buchhandlung, pp. 126. 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.
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
9
10
11
12
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.
Karl Bücher. 1922. Die Entstehung der Volkswirtschaft. II. Tübingen: Laupp'sche
Buchhandlung, p. 3.
"[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. 19063. System der Armenpflege und Armenpolitik. (System of Poverty
Care and Poverty Policy). Stuttgart and Berlin: J. G. Cotta'sche Buchhandlung
Nachfolger, p. 76.
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.
"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.
13
14
Volkswirtschaft. II. Tübingen: Laupp'sche Buchhandlung, pp. 1-26.
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.
"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
16
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.
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
18
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.
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
20
21
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.
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.
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
23
24
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.
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.
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
26
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.
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
28
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.
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 wellestablished 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
Ackerman, Felicia. 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.
Alchian, Armen A. and H. Demsetz. 1972. "Production, Information Costs, and
Economic Organization." American Economic Review. 62, pp. 777-795.
Arrow, Kenneth. 1963. "Uncertainty and the Welfare Economics of Medical Care."
American Economic Review. December 1963, 53 (5), pp. 941-973.
Backhaus, Jürgen. Editor. 2000. Karl Bücher: Theory - History - Anthropology - Non
Market Economics. Marburg: Metropolis.
225
Backhaus, Jürgen. 1989. "A Transactional Approach to Explaining Historical Contract
Structure." International Review of Law and Economics. 9, pp. 223-226.
Backhaus, Jürgen. 1998. "Efficient Statute Law." Peter Newman, Editor, The New
Palgrave Dictionary of Economics and the Law. Vol. II, pp. 24-27. London: Macmillan.
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.
Baumol, William J. 1995. "Health Care as a Handicraft Industry." The Office of Health
Economics, Annual Lecture.
Bücher, Karl. 19195. Arbeit und Rhythmus. Leipzig: Verlag von Emmanuel Reinicke.
Bücher, Karl. 1922. Die Entstehung der Volkswirtschaft. I. Tübingen: Laupp'sche
Buchhandlung.
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.
Crocker, Thomas D. 1971. "Externalities, Property Rights and Transaction Costs: An
Empirical Study." Journal of Law and Economics 14.
Epstein, Richard A. 1997. Mortal Peril. Our Inalienable Right to Health Care? AddisonWesley Publishing Company, Inc. Reading, Massachusetts.
Fuchs, Victor R. 1996. "Economics, Values, and Health Care Reform."* The American
Economic Review. March 1996, Vol. 86, No. 1. *Presidential Address at the onehundred eighth meeting of the American Economic Association, January 6, 1996, San
Francisco, Ca.
Katalog der Karl Bücher Bibliothek in der Wirtschaftswissenschaftlichen Fakultät der
Universität Kyoto. (Catalog of the Karl Bücher Estate, Faculty of Economics, Kyoto
University). Kyoto. 1970.
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Belgium and Germany: A Comparative Analysis". Leidl, Reiner. Editor. Health Care
and its Financing in the Single European Market. Amsterdam: IOS Press (Biomedical
and Health Research, Vol. 18). pp. 230 - 253.
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Polanyi, Karl. 1968. "Bücher, Karl." International Encyclopedia of the Social Sciences.
pp. 163-165.
Posner, Richard A. 1997. "Social Norms and the Law." American Economic Review.
May 1997, 87 (2), pp. 365-369.
Schmoller, Gustav. 1923 (2). Grundriß der Allgemeinen Volkswirtschaftslehre. First
Part. (Blueprint, I). Munich, Leipzig: Duncker & Humblot.
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.
Wheelan, Charles J. 1998. "To Get an Organ, Offer to Give One." The Wall Street
Journal. December 29, 1998.
Thünen, Johann Heinrich von. 18753. "Der isolirte Staat" in Beziehung auf
Landwirtschaft und Nationalökonomie. ("The Isolated State" in Relation to Agriculture
and the Economy.) Part I. Berlin: von Wiegandt.
227
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
2
3
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.
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.
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
6
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.
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
8
9
This Dutch researcher was only enabled to conduct his research successfully
after his appointment to Berlin.
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.
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
11
A list of persons belonging to the academic network of Althoff has been provided
by Vereeck, op. cit., pp. 65, 66.
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
13
Compare Laurie J. Mullins. 1993 (3). Management and Organisational
Behaviour. Great Britain: Pitman Publishing.
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. Nonpurchasers, 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
15
Paul A. Samuelson. 1954. "The Pure Theory of Public Expenditures." Review of
Economics and Statistics. 36, pp. 387-389.
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
16
17
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.
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.
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 AertzeCorrespondenz 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
21
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.
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 (18361907), 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 KaiserWilhelm-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
24
25
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.
The Koppel foundation of one million Mark financed several projects, and also
part of the international professorial exchanges. Vereeck, op. cit., p. 79.
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.
26
the "Red Eagle." For a detailed explanation of Althoff's strategy see footnote
211, Vereeck, op. cit., p. 80.
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
28
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.
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
30
31
The journal was also known as Virchow's Archiv. See "Virchow, Rudolf," op. cit.,
p. 175.
Lelland J. Rather. 1995. "Virchow, Rudolf Ludwig Karl." Collier's Encyclopedia.
New York: Collier's, p. 152.
"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 (18591956), 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
34
35
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.
"Behring, Emil Adolf." 1923 (2) The New International Encyclopedia, op. cit., Vol.
III, p. 76.
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
38
39
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.
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.
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
41
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.
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 KaiserinAuguste-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
42
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.
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
44
Althoff's informational network in the case of the appointment of Behring has
been documented by Eckart, op. cit., 1991, p. 394.
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 decisionmaking 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
47
Gordon Tullock. 1966. The Organization of Inquiry. Durham: Duke University
Press.
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
Alchian, Armen A. and Demsetz, Harold. 1972. "Production, Information Costs, and
Economic Organization." American Economic Review. 62, pp. 777-795.
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." 19232. 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.
Rather, Lelland J. 1995. "Virchow, Rudolf Ludwig Karl." Collier's Encyclopedia. New
York: Collier's, p. 152.
Samuelson, Paul A. 1954. "The Pure Theory of Public Expenditures." Review of
Economics and Statistics. 36, pp. 387-389.
"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.
255
"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-PlanckGesellschaft. Aus Anlaß ihres 75jährigen Bestehens. (Research between Politics and
Society. History and Structure of the Kaiser-Wilhelm-/Max-Planck-Gesellschaft).
Stuttgart: Deutsche Verlags-Anstalt.
"Virchow, Rudolf." 1923(2). The New International Encyclopedia. New York: Dodd,
Mead and Company. Vol. XXIII, pp. 175, 176.
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).
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256
257
258
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
2
3
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.
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.
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,
4
5
6
Landholding and the Social Question). Berlin: Deutsches Verlagshaus, p. 7.
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.
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.
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 wellbeing 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
7
8
9
Bernard Mandeville." Proceedings of the British Academy, 52, pp. 125-141.
"Quesnay, François." 1923(2). The New International Encyclopedia. New York:
Dodd, Mead and Company, p. 439.
Berlin: Fontana.
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
10
11
12
13
Cooperatives and the Agricultural Question). Berlin: Vigh, Deutsches
Verlagshaus.
Berlin: Vita.
Berlin: Georg Reimer.
(1) 1922/23, (2) 1926, (3) 1923/24: Jena: Gustav Fischer.
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
14
15
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.
Franz Oppenheimer. 1898. Grossgrundeigentum und soziale Frage. (Landed
Estates and the Social Question). Berlin: Deutsches Verlagshaus, p. 6.
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
17
Franz Oppenheimer. 1921. "Gustav Schmollers `Soziale Frage'." Technik und
Wirtschaft. Berlin: Verlag des Vereines deutscher Ingenieure.
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
19
Franz Oppenheimer. 1898. Grossgrundeigentum und soziale Frage. (Large
Property Ownership and Social Question). Berlin: Vita, p. 165.
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
21
22
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.
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.
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.
Hayek, Friedrich A. von. 1966. "Dr. Bernard Mandeville." Proceedings of the British
Academy, 52, pp. 125-141.
Kenessey, Zoltan. 1995. "The Emergence of Quantitative Thinking about Mortality and
Life Expectancy." International Review of Comparative Public Policy. Vol. 6, pp. 291311.
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.
"Quesnay, François." 1923(2). The New International Encyclopedia. New York: Dodd,
Mead and Company, p. 439.
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.
271
272
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
2
3
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.
Joseph A. Schumpeter. 1954. History of Economic Analysis. New York. Oxford
University Press, p. 6.
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
5
6
7
Max Weber. Editor. Grundrisse der Sozialökonomik. I. Abteilung: Wirtschaft und
Wirtschaftswissenschaft. Tübingen: J. C. B. Mohr (Paul Siebeck).
Graz and Leipzig: Leuschner & Lubensky.
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.
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
9
10
11
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.
New York: Harper.
Jürgen Backhaus, 2002, op. cit., p. 92, and Jürgen Backhaus. 1979. "Pareto on
Public Choice." Public Choice. Vol. 33, I, pp. 5-17.
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
13
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.
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
16
Schumpeter here refers to the mechanism of entrepreneurial activity, described
in chapters 2 - 6.
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
17
18
19
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.
Wolfgang Stolper, 1988, op. cit., p. 70.
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."
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 nonmarketnongovernment 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 wellbeing. 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
24
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.
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 smallscale 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 SubSaharan 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
25
26
27
Stolper, Christian Seidl. Editors. 1985. Aufsätze zur Wirtschaftspolitik. (Essays
on Economic Policy). Tübingen: Mohr Siebeck, pp. 226-247.
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.
Mark Casson. Editor. 1990. Entrepreneurship. Great Britain: Edward Elgar.
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
29
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.
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
30
31
immense medical progress taking place in Prussia. He devised ingenious
ways to finance medical research, identified creative and able professionals
and promoted their careers.
Gerhard Scheuerer and Jürgen Backhaus. 2004. "The 'Inexplicable' Population
Decline in Thuringia." Erfurt University, Faculty of the State Sciences, working
paper October 15, 2004.
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
34
35
Richard A. Epstein A. 1997. Mortal Peril. Our Inalienable Right to Health Care?
Addison-Wesley Publishing Company, Inc. Reading, Massachusetts, p. 364.
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.
Marc C. Casson. 1993. "Entrepreneurship." The Fortune Encyclopedia of
Economics. Ed.: David R. Henderson. New York: Warner Books Inc., p. 631635.
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 wellbeing.
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 smallscale 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.
290
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293
294
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 agroindustrialization 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
3
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.
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 (16791754) 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
5
6
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.
Compare the entry: “Market Failure,” in: Anthony J. Culyer. 2005. The Dictionary
of Health Economics. Edward Elgar. Cheltenham, UK, p. 207.
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
2
3
4
5
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.
Anthony J. Culyer. 2005. The Dictionary of Health Economics. Edward Elgar.
Cheltenham, UK, p. 150.
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.”
But see as a major representative of the whig approach Mark Blaug, 1985,
Economic Theory in Retrospect. Cambridge: Cambridge University Press).
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
8
9
10
11
12
Menger
Schmoller
Bücher
Althoff
Oppenheimer
Schumpeter
K
L
7
Wagner
J
6
Roscher
F
G
H
5
Justi
E
Demand
Supply
Information
Optimal
Contracts
Market for
Pharmaceuticals
Insurance
Technology
Institutions
(hospitals,
nursing homes)
Evaluation of
Life
Social Insurance
Policy and
Future Issues
4
Wolff
Paracelsus
A
B
C
D
3
A/2
B/2
C/2
D/2
A/3
B/3
C/3
D/3
A/4
B/4
C/4
D/4
A/5
B/5
C/5
D/5
A/6
B/6
C/6
D/6
A/7
B/7
C/7
D/7
A/8
B/8
C/8
D/8
A/9
B/9
C/9
D/9
A/10
B/10
C/10
D/10
A/11
B/11
C/11
D/11
A/12
B/12
C/12
D/12
E/2
E/3
E/4
E/5
E/6
E/7
E/8
E/9
E/10
E/11
E/12
F/2
G/2
H/2
F/3
G/3
H/3
F/4
G/4
H/4
F/5
G/5
H/5
F/6
G/6
H/6
F/7
G/7
H/7
F/8
G/8
H/8
F/9
G/9
H/9
F/10
G/10
H/10
F/11
G/11
H/11
F/12
G/12
H/12
J/2
J/3
J/4
J/5
J/6
J/7
J/8
J/9
J/10
J/11
J/12
K/2
L/2
K/3
L/3
K/4
L/4
K/5
L/5
K/6
L/6
K/7
L/7
K/8
L/8
K/9
L/9
K/10
L/10
K/11
L/11
K/12
L/12
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 (14931541) 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 supplierinduced 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
7
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.
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
10
Richard A. Epstein. 1997. Mortal Peril. Our Inalienable Right to Health Care?
United States of America: Cato Institute.
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.
311
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.
312
(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
12
A national health care service can either be financed by taxes or by compulsory
health insurance.
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.
13
Harvard University Press.
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
317
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, wellorganized 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. 318324).
(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 emotionrelated 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 shortsightedness 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 healthrelated 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
19
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.
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 reelected, 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 (18381917), 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
21
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.
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 nonstandardized 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
Development23 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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(History of Political Economy). München: R. Oldenbourg.
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.
Schmoller, Gustav. 1923. Grundriß der allgemeinen Volkswirtschaftslehre. Erster
Teil. (Blueprint, Vol. I). München, Leipzig: Duncker & Humblot.
Joseph A. Schumpeter. 1912. "Das Gesamtbild der Volkswirtschaft." Theorie der
wirtschaftlichen Entwicklung. 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.
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.
343
344
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.
345
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.
358
List of Illustrations
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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.
361
362
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.
363