Economists have difficulty reconciling free markets and the role of government. The ultra-iberals want everything to be free markets and private enterprise-the leftists want all to be run by a socialist government. I write this post to explain clearly which domains should best fall in government, and which ones should fall under free markets and private enterprise.
The rule-Government should dedicate itself to pain-relief type roles in society. The other activities, which are to increase citizens' pleasure, should be left to private enterprise.
A military (to protect citizens of country from other hostile countries) is best handled by an organized government. Mercenaries don't make good soldiers-when the country starts to lose they will run away. National glory and public esteem exist for soldiers-that's why they lay their lives for protecting their countrymen. Absent these-no sane man would fight for his country. A private enterprise military probably looks good in peace times, but any threat of a serious war, and these guys will disintegrate. Put another way, a private military will charge an exorbitant amount of money to provide security to a country, when really needed.
Police force (internal to the country-to protect citizens from hurting each other) is another example where the government is best at doing the job. If private cops were hired for security, they would charge exorbitant amounts of money to give security. When you have an intruder outside and are begging for help on the 911 line, they will charge you $5000 to send a cop. Not good, is it?
Firefighters must also be a State run enterprise. It is a glorious, respectable job. The death of a firefighter in action gets the same respect as the death of a soldier or policeman in action. If firefighting became a private, monetary gain enterprise, costs of getting someone to put out a fire would be astronomical. There were private fire fighter companies when the United States was formed a few hundred years ago, around 1800AD-there were many problems and they were all nationalized. See more details here in Tina Dupuy's article.
All countries of the world have these departments- military, police and firefighters under the government, as you might expect.
Notice that these are pain-relieving in nature-citizens need to pay these institutions of military and police to keep away the pain of being attacked by a foreign nation or by a violent individual in their country or by a fire killing them and destroying their possessions.
Now consider a home builder, a cell phone provider, or a furniture maker or an electric car maker. Products of these companies bring pleasure to society (most of their production, not all) and these are best left to private enterprise. However, a government must ensure enough competition, at least 5 actors in each industry, to make this work. If there are 3 actors or less, they will collude to raise prices, and you will give them a monopoly against their own citizens. (Digression: Any country which has less than or equal to 3 cell phone providers has cell phone companies charging exorbitant amounts of money for something which is very useful, but very cheap to make (cell networks). Most of the capital of cell phone providers is spend in useless activities like marketing, image-protection, and often thwarting entry of new competitors. They do not go to improve the network or reduce cost of calls. Countries where you have more than 3 cell phone providers have some of the lowest cost of cell phone calls in the world (e.g. UK, India).)
Pleasure providing activities do not need a government to run them-and the capital for these must be left in the hands of private citizens and corporations. This is where Adam Smith's laws of economics work the best. You have more and more pleasure providing objects and services as countries get richer-and they all are produced by private companies.
Health care is an area, because it is by its very nature pain-relieving, is best left in the hands of the government. I am all for social medicine. All countries where public health care is low-e.g. USA, Chile, Canada, you have rich doctors, who become nothing more than merchants (that's their incentive). I don't like doctors who are very rich, just as I wouldn't like military people or policemen who are rich. I respect their profession, and large monetary compensation for them necessarily reduces my respect for them. Even a politician is like that-a rich politician deserves no respect from me, but one who lives reasonably but is more interested in doing good to society is more likely to excite my respect. Doctors who are rich have already charged a HIGH PRICE for their service to me-I can't screw myself more by respecting them! I have given them my money, that's enough.
Instead of pain relieving, you can think of basic necessities. It is good if government dedicates itself to providing basic necessities of society-and the others are best taken care of by a free market (always with enough competitors). electric utilities are an example of an industry which is best kept in the hands of the government, or needs to be heavily regulated if there are less than 3 competitors. If you think that healthcare, at least basic healthcare is a basic necessity just like the security of citizens (provided by Police), it should be completely free and easy to access, without you having to buy insurance or stand in long lines.
The most important thing I want to take you from this post is that free markets DO NOT WORK for pain relieving activities, even if there is free competition. You can have any many doctors and private hospitals as you want, but that will not be a good system. The doctors and hospitals have a huge incentive to lie, to make up stuff to charge their patients more...and that's why these activities are not handled well by private enterprises. Someone lying about their car or coffee is one thing-but when doctors start to lie, it is a sad society. This has happened in The USA, Canada and Chile, where you have loads of these doctors and clinics who do completely unnecessary procedures to people. The goal is mercenary. A public health system would be much better for healthcare. Even poor India and relatively poor Argentina and Thailand have vastly better healthcare, with good moralistic doctors, than Chile, Canada or USA. The incentives for the profession have not been set right-a doctor should strive to be prestigious, a life saver-and not to make more money! Just as for a policeman or a military guy-I don't want any of these guys to be rich. A society where they are rich is not a fun society for me. France is a great example of a country to emulate in health care-it is almost all public, there is absence of large private hospitals, and there are no rich doctors. Germany is great too; I have never met a rich German doctor.
In France, a person who is more sick pays less; the very sick and old people pay nothing. The co-pay goes down with the degree of illness. It is only humane that someone who is already very sick with a bad illness, e.g. terminal cancer, be charged LESS than someone who comes about with a minor problem, that the state or society as a whole bear a larger fraction of the cost for the former. Terminally ill patients do not pay anything in France for health-care. Capitalism in medicine has it backwards-if you are really sick, you pay more. You can see the problem now-the system is illogical, the really sick and the dying are given a double whammy of paying more.
A capitalist is okay charging USD 1000 to a man dying of thirst in a desert. But you know it is morally wrong. The same is true for healthcare. It is a basic necessity which should come at a very low cost if not completely free. And the Government is the best handler for it.
Or consider this example...how can you feel good charging thousands of dollars per day for a baby born premature, or for giving someone a fast palliative surgery? The doctors who are doing this all are a "part of the system"..and you are left footing the bill. All morality in providing for your brethren when they need you is lost when healthcare and drugs are privatized; you need a strong public system to administer this vital part of society. I have found substantial difficulty paying for doctors in countries where healthcare is private not because of the money, but because of the morality of paying someone to relieve me of my bad state. On the other hand, I have no problem if someone wants to charge $100K for a Tesla or a few million dollars for an apartment in Manhattan; those are pleasure providing objects, and the seller should try to charge the maximum they can in such dealings. However, for pain-relieving activities, the seller should charge the minimum-it is morally the only way you can feel good if you are a seller of pain-relieving activities like doctors, pharmacies, firefighters, police, etc.
As much as I am a fan of public health care, there is still a middle ground-where both private and public entities in the sector can exist together, the consumer deciding which one they prefer. The Government should invest in public universities to give free or cheap medicine degrees to bright and hard working students, open public hospitals so people do not need any insurance to be taken care of there, and have a good network of emergency personnel completely free of cost. Side by side, you can have the private sector exist-I don't see a problem with that. But the Government should be an actor in the healthcare sector-and once they start putting hospitals etc. they will realize that people do really trust public medicine more than private medicine, and most healthcare falls in the hand of the government. It would be like the police-you have a strong network of a police force which is free and government sponsored; and you are also free to hire your own security guards if you need to. But the basic security net of police is free for all, treats all equally, and does not need insurance; that's what governments should strive to provide. After that if the rich want to get their own medical care, that's fine. But a good part of the government's financial budget should be invested in healthcare-giving basic healthcare and emergency healthcare the same priority as the police or the military.
Something similar happens in the US in another field-you get medical insurance if you have a job. If you don't have a job, you don't have medical insurance. It is exactly the ones who do not have a job who need more help-but the rules are designed instead to punish them even more. The rationale for this policy is that bums should not be supported by society, etc. Completely ignored is that fact that getting a job is not easy, and most people out of a job are not bums, are just temporarily out. The medical insurance tied to having a job is a really bizarre practice in that sense. The jobless are the ones who need it the most, and are denied. Many people in the US hold on to menial jobs because they can't buy private insurance and with a job at least they get mandatory coverage provided by their employers. A person is not allowed to take a break of a few years and go without a job.
In some ways what I am saying is an extension of what Smith realized-that people don't want to pay anything for things they need, but will pay happily for things they want. He gave the example of water-everyone needs water, but no one wants to pay for it exorbitantly. The same goes with basic necessities-they should be as cheap as possible, if not free-because in the end the NET PRODUCTIVE OUTPUT of society, as measured by the consumable goods it produces, will go up. A society full of doctors and funeral services people is clearly a very poor and miserable society.
Same goes for Insurance providers. We don't want them to be rich-we want them to have their low profits and let them provide a service to society at the lowest cost possible (division and spreading out of risk is their main job). A Government run insurance company in healthcare is an excellent solution-and even if you have private health care companies, in any country where you have a Government run health insurance company, the Government health insurance company is the biggest player in the insurance market, by the choice of its citizens, who know that for critical stuff like healthcare, they can only trust their Government. A private health care company always finds excuses to back out of covering you when the bills are high, a government run insurance company does not do that.
Pharmaceutical companies are a case in point. You would think that when you buy stock in Pfizer or Merck you are buying scientists and innovation-but a large part of these companies are people working in distribution, marketing, and sales people. The common capitalistic argument that paying high price for your drugs (medicines) puts more money into the pockets of these companies and therefore encourages innovation is false-because most money is gone to increase sales forces, management teams, etc. Plus even if it would go 100% to scientists, it would encourage fraud and fudging of data. No one said that you get a better police force or military if you pay for it directly. Why are we saying it for doctors and big pharma?
The argument that you need to pay them to advance innovation and cutting edge science is false. NASA and the US Military come up with loads of innovative technologies-and are Government owned. Innovation and science is a great thing in itself-there is no need for exorbitant monetary gain to get with it. True Doctors who really want to help people should not want to become stinking rich. More on this here.
Therefore, the original rule I said-that things which are pain relieving in society should come as cheap as possible, becomes even more plausible. Encouraging this automatically increases the overall production of society-the cheapness of pain relieving activities or necessities of life encourages the production of other (wanted but not needed) consumable goods. Let those be governed by the free markets, etc. but essential goods and services a society should try to produce at the lowest cost, and if that means they rest with the Government (like the police and military), so be it.
I want to stress that I don't want to see doctors who are poor-just like I don't want to see police, firefighters or military men who are poor. I want them to live well, earn their decent, stable earnings; but none of these categories of people I want to see being very rich. If money is their compensation, they are prone to lie to and abuse the other members of their society or country.
Related article: Free trade, anti-dumping duties and trade tariffs - Government policy should be pro consumer, pro abundance, and not pro producer