I had a great discussion not long ago with a naive believer in “free markets”—naïve in his fairly unexplored belief that the market provides a better solution to pretty much any problem than government does. Over lunch, after a talk I gave, this fellow objected to my description of the need for the government to set the right parameters for the healthcare market through regulation. Wouldn’t the free market do that better, he asked?

I thought a moment and asked him, “We’re sitting in a hotel ballroom. There is electricity all around us, in the wall plugs, in the lights overhead. How safe do you think we are from an electrical fire? How likely do you think it is that this hotel, over its lifetime, will burst into flame from electrical fire?” Not very likely, he said. “Can you recall hearing of such a thing happening, in recent years?” Um, no. “Electrical fires used to happen a lot, say, 80 years ago. I used to do this work, when I was in construction. I was barely out of high school, and didn’t know much about it when I started, but I am sure my work turned out quite safe. Let me suggest that the reasons hotels don’t burn down from electrical fires is government regulation that makes installing electricity that rarely fails, and fails safely when it does, a no-brainer. It’s all according to safety codes, the wires are color-coded, and checking your results is easy and fast. You don’t need skills, particularly, to do it in a fail-safe manner. You just follow the rules.”

Why, he asked, don’t we just wait until there is a fire, then sue the people who installed faulty wiring? “Well, what if there was a fire right now. Imagine that the insurance inspectors were somehow able to pinpoint the cause to an electrical fault—which would take some doing. But suppose they could. So the insurance company sues the general contractor who built the place 30 years ago, if it’s still in business. The general contractor turns around and sues the electrical subcontractor. The electrical contractor counter-sues, saying that it’s your fault because one of your guys must have moved the electrical box after my guys installed it when you re-framed for that doorway…and on and on. To get a tort result you have to be able to pin down the fault to a particular action, and pin that action on a particular person, in a court of law, arguing against lawyers who are trying to prove the opposite. Most mistakes or bad designs or cheap materials are never caught, many failures happen years later or in ways that don’t trace back to the original problem, and most failures can never rise to the level of proof required in a courtroom. So lawsuits are a woefully ineffective way to make people do better work. If you do shoddy work, most of the time you can get way with it–and there will always be huge incentives to do it as cheaply as possible. As an electrical contractor, you can only afford to do it right if everyone does it right. The same incentives apply to a device manufacturer, a pharmaceutical company, a health insurer, or anyone else in healthcare. You can’t afford to do it right if your competition can get away with doing it wrong.”

In the end, the right kind of regulation is good for business, as well as for the public.