There are three basic economic questions about the use of scarce resources: what to produce, how and for whom? These questions are as valid for the healthcare system as they are for the economy in general. In healthcare, assuming the ethical imperative covers everyone in a population (see Chapters 2 and 3), these questions then translate into who pays (financing), what is paid for (economic evaluation and health technology assessment) and how to pay those who provide care. Answering these questions can be left to the market, the state or a combination of both. Healthcare systems in different countries around the world answer these questions in different ways. Despite its shortcomings, most economists would agree that markets (appropriately set-up and regulated) are in many areas the best means of allocating goods and services in the most effective and efficient manner.

This chapter takes a neoclassical look at markets and then goes on to review the many shortcomings of markets in medicine. In the case of market failure, the alternative might be provision by the state. We therefore discuss the advantages and disadvantages of state interventions (see Section 10.3). A new approach aims for international financing when neither markets nor governments are able to deliver global public goods. This chapter sets the stage for introducing options to financing healthcare (Chapter 11), identifying what to pay for in healthcare (Chapters 12 and 13) and looking at forms of payment for those who provide care (Chapter 14).

Markets

Markets are a key element of economic analysis. For our purposes, we will focus on healthcare markets, as health and capabilities as such cannot be purchased on a market. Although individuals demand good health and useful skills, the means to obtaining and maintaining these are through the consumption of healthcare and education. Therefore, it is said that the demand for healthcare is a derived demand because the real demand is for health.

Perfect market conditions exist when the products traded are homogeneous, no market entry barriers exist, complete and symmetric information is available and the number of suppliers and buyers is infinitely high. Under such complete competition, all market participants act as price-takers and their market behaviour is exclusively determined by the quantity of goods that they ask or offer on the market (quantity adjusters).

The neoclassical approach is the prevailing paradigm in health economics (and all else). It aims to be both a scientific enquiry into the choices that individuals actually make (“positive economics”) and a way of advising policy-makers about the social choices that they should make (“welfare economics”). The key point is that neoclassical thinking assumes individuals know what they are doing, so it is best to leave them alone. They are predictably rational and narrowly self-interested and make decisions to benefit themselves. Consequently, free markets – in the view of neoclassical economists – are the most efficient way to distribute goods and services. Only in a few specific instances do markets malfunction and the state needs to intervene – with the proviso that government failure also occurs.

Neoclassical economics has several strengths, which partly explain its success. It starts from the individual and her rights and thus resonates with western ideas of freedom and individualistic, rights-based thinking. It is the only economic theory that is able to model whole economies (not just parts of them) with mathematical methods. It offers an intuitively appealing narrative and makes bold claims about individual and social behaviour. Its math-ematical approach appears prima facie to be a natural science and thus it is seen as a “hard” science with conclusions that are often treated like fact-based, logically derived results.

This chapter provides a first approach to some key elements of the discipline that are essential for understanding health economics.

Neoclassical theory is built on several key assumptions: first, people are rational individuals: the Homo economicus being the paradigm for the individual. Consumers are represented by their utility function, which, in turn, is based on von-Neumann–Morgenstern axioms (i.e. the utility functions meet mathematical requirements – they are complete, stable, transitive and independent from irrelevant alternatives – see below). Supply is modelled via production functions that represent producers. Second, markets work at infinite speed and are free of transaction costs, and all information about prices now and in the future is known to all. Third, and finally, institutions and laws do not matter much for economic analysis and are at best only providing the framework for individual interaction.

Management: history and terminology

Healthcare management is often defined as leadership and direction in organizations that deliver health-related services – such as hospitals, pharmaceutical companies and health maintenance organizations (HMOs) (Olden 2019). In this chapter we will not go into great detail on every function of management theory. Rather, we will give a brief overview of the terminology of management, its purpose, instruments and techniques, and how it fits into the broader concept of “economics” – with a focus on healthcare.

Everybody manages their life and day-to-day activities. However, the word “management”, as it is typically used today, is injected with a certain sense, namely, to rationally direct people in organizations in order to achieve something, typically objectives.

These objectives can be quite different and depend on the specific organization. For example, a church-owned hospital may pursue several objectives: to spread Christian belief, to take care of the poor and to achieve a balanced budget. A privately owned GP practice may just earn the owner's income and keep co-workers happy, whereas a pharmaceutical company will probably focus on shareholder value (that is, maximizing its owners’ capital). Depending on their objectives, management activities can be quite different.

What is “best” in management heavily depends on its current environment. Legislation influences which potential activities are available – if the laws prohibit slavery, there is no alternative to employees, and new legal product requirements will also change the ways in which to manage a business. There are regional differences in the way a company can be founded (a British limited company differs somewhat from a German Gesellschaft mit beschränkter Haftung – GmbH – a company with limited liability). Other environmental factors that influence what management is about are, amongst others, technical means and psychosocial culture (e.g. assumptions about the behaviour of customers and employees). As a result, management theory tries to find successful activities that fit a certain, externally produced and somewhat random environment.

In Chapter 5 we discussed the way healthcare is actually financed, in Chapter 11 we reviewed theoretical options to finance healthcare, and in this chapter we look at the practical aspects of implementing a rational financing system. This topic is addressed over three chapters because financing of the entire workings of a healthcare system is vitally important. The “bottom line” of funding and generating income or profit is a driver for people's behaviour and, although money is certainly not everything in healthcare, it is not possible to establish a sustainable system that goes against people's basic rights and monetary motivations (Gómez-Dantés 2018). After reviewing the principles of financing and introducing the criteria and three core functions of any financing scheme, we discuss the goals of a government-run health financing scheme. We then go on to consider how to implement a scheme at the national level and look at technical aspects, actuarial calculations and monitoring.

Principles of financing

The core principles of financing healthcare might be described as follows: (1) rational use of pluralistic financing mechanisms; (2) prudent investments; (3) redistribution and justice; (4) reduction of OOP expenditures, including co-payments, to an acceptable level; and (5) national dialogue involving all stakeholders. These are explained below:

The pursuit of governance is hardly a modern preoccupation: the fourteenth-century Sienese painter Ambrogio Lorenzetti titled one of his iconic frescos “The Effects of Good Government”. A bustling construction site, the chatty merchants, a hosiery shop, a handful of patrolling soldiers, a teacher and his students, dancers and artists: had Lorenzetti also painted a physician's waiting room and a retirement community, his “allegory” on government would have anticipated the welfare state by some hundreds of years.

When colours, forms and composition remain so vivid and powerful, they provide a better rendering of governance than a hundred scholarly articles. Indeed, to come up with an agreed definition of “governance” is a hopeless cause. In some languages, the word is untranslatable altogether. In some neo-Latin tongues, the term is simply referred to as “government”, which places emphasis on the domestic level and executive power. In a rather standard definition, the World Bank defines governance as: “the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them”.

In other interpretations, governance is a more performative exercise, which finds its realization in the practices and perceptions on governing rather than in any specific action or mechanism. Not unlike Lorenzetti's fresco, it accounts for the “effects” of government for citizens, practices that we recognize in everyday life.

Over time, our understanding of governance has coalesced into a more cohesive body of practices. The casual observer of public policy will likely have heard of the “Washington Consensus”. The phrase, originally coined by economist John Williamson, is associated with the set of economic and social policies prescribed by lending institutions, as well as most Western governments, upon delivering financial assistance abroad. The choice of the word “consensus” entails the acceptance of a worldview that puts its faith in liberalization of services and goods, fiscal discipline and deregulation.

Just as importantly, the term has long been associated with its presumed global exportability: the gradual convergence of nations divided by different cultures and political traditions around a common normative template and standards.

I have always been fascinated by the repetitiveness of Scandinavian surnames. In the quarter century between 1993 and 2018, three prime ministers followed each other in Denmark, all of them called Rasmussen without being related. This fascination was partly satisfied when I came across a 1965 essay by Carl Henrik Hermanson entitled: Monopoly and Finance: The Fifteen Families. The book chronicled in detail the history of the concentration of wealth in Sweden through its most important families, and corroborated my anecdotal impression of being confronted with a tightly-knit elite, which in a small country is inevitably destined to occupy top positions in business, government and cultural institutions.

Having dwelled on the method of a middle way governance, the next step of this inquiry will focus on the sources of governance: who should we enlist when we seek the new middle way. Known for its egalitarian streak, the Nordic model is in this respect misleading. Even in the fair and equal North, there is a “1%”, a plutocracy of individuals that accumulates power and wealth. Unlike in the rest of the Western world, the Nordic elite is not demonized by the remaining 99 per cent: the Jeff Bezoses or Mark Zuckerbergs of this world that earn money even when they are setting up charities2 are not the target of popular opprobrium.

As elsewhere, the Nordic middle class has been eroded by growing privatization and deregulation. But at least at face value, this has not led to an endemic widening of social and economic divides as experienced in other Western countries. Nor has it erased the centrality of middle management in public and private organizations, with all that that entails in terms of the mobility of individuals growing and rising through the ranks. By the time Marquis Childs grew old in the 1980s, he might have come to witness the “McKinseyfication” of America's economy and society, or what Daniel Markovitz calls the “consulting revolution”, which outsourced key public services, in the name of efficiency and shareholder primacy. This would also come to pervade the Nordic countries. As we shall see, the private sector has taken over large swathes of public management, changing the mindset with which critical functions of the state are performed. But it has not led to the hollowing out of the middle class.

These being the most influential 300 square-feet in the whole country, they look remarkably frugal. The lamps and ubiquitous candles form a choreography of asymmetric shadows on the pastel-coloured walls. If it were not for the copies of local and international dailies scattered on the mid-century teak desk, it would be hard to guess that this is the office of the editor-in-chief of the most important newspaper in the country.

I am about to be seated on one of two opposing dark-brown leather armchairs next to the desk, and I ask to have a glimpse of the majestic view from the corner office onto Copenhagen City Hall Square. Alas, I do not get to breathe any of the self-importance I had anticipated: the square has been transformed into a gigantic crater for the construction of a new subway line. It has been a frustratingly long project, marred with delays and minor accidents. Most Danes are fed up with the Italian contractors widely blamed for the blunders – even though afterwards they are immensely proud of the unmanned metroline they have delivered. “I really can't say”, answers the soft-spoken secretary with a smile, when I ask when they will be finished.

Before serving at the helm of Politiken, Denmark's leading daily, Bo Lidegaard had done most other things. A career diplomat, he was a top advisor of successive prime ministers and embodies the glorious technocratic tradition that sustains democratic institutions in Europe's North. As a historian, he has chronicled the origins and development of the modern Danish state and the life of some of its most defining statesmen. His best-known book Countrymen recounted the story of the rescue of Danish Jews in 1943, and was a bestseller translated into several languages. His name does not appear on the ballot paper (though the surname does, as Lidegaard's younger brother was Denmark's foreign minister). Yet this diverse background makes him something of a polymath of Danish democracy.

Newspaper editors are legendary for their short attentionspan and even shorter fuse. So precious is time in blue-chip journalism, that the Financial Times at one point offered one-to-one chats with the editors in end-of-year charity auctions at Christie’s. Here I did not have to bid in order to obtain a full 45-minute conversation starting with the origins of modern Scandinavian statehood in the nineteenth century.

Let us go back for a moment where this journey started, in Copenhagen. After that disgraced climate summit of 2009, most governments would have probably lain low for a while. At a time of economic downturn and austerity, it was not apparent that climate investments were an “insurance policy” on the future, as the Danish government kept billing them. Even for an obsessively eco-friendly public, it was not self-evident why Denmark or Europe should take a worldwide lead on climate, when no-one else is there to follow.

Yet, the tiny kingdom hosting that tragic display at the Bella Conference Center begged to differ. Denmark had made of climate policies a hallmark of its global image; what issue could be better to brand a small nation at the top of Europe than saving the planet from deliberate self-destruction. After such a debacle, anyone would be forced to reconsider priorities. But over the past decade Denmark's climate policies have been nothing if not ambitious. Since the COP15 summit failure, Copenhagen first reached its greenhouse gas emissions reduction targets at 20 per cent in 2020, then raised them to 40 per cent for 2030. Officials have no qualms in admitting that meeting this objective required heavy public investment. But after it outpaced its own 2020 target of reaching a 30 per cent share of renewable energy, Denmark set a 55 per cent target for 2030. A broad cross-party coalition has ensured the goal of phasing out all fossil fuels production by the year 2050. In 2019, Copenhagen set out to become the first carbon neutral capital in the world by the year 2025.

Where it gets interesting is in the means necessary to support these policies. There are the familiar things, such as improving efficiency and extending financial incentives in renewables. But Denmark is also seeking ways to stimulate innovation and to make green investments attractive for companies. Together with South Korea and Mexico, in 2013 Denmark launched a Global Green Growth Forum (3GF) to marry bottom-up ideas from corporate and research actors with top-down government support. Companies such as Samsung, Siemens and General Electric joined forces with the likes of University of California, Berkeley and WWF, aided by governments that pledge to create a stable environment for green investments. Civil society, businesses and the media are part of the endeavour at all times.

“Crawl back under your rock!” There is not much diplomacy left to spare in Margot Wallström. The then Swedish foreign minister will be remembered as one of her country's most respected statespersons of the beginning of this century. She has embodied the values of openness, equality and tolerance that we associate with Europe's North. Among other initiatives, she pioneered a “feminist” foreign policy, to promote equal opportunities in all aspects of Sweden's international projection. And it is precisely in relation to this that she clearly lost her cool. The target of the fury that led her effectively to compare him to a snake is Jordan Peterson, Professor of Psychology at the University of Toronto, who had earned a reputation and a large following for his politically incorrect positions, in particular on gender issues.

Peterson was in Sweden to promote one of his books and found himself entangled in a dispute on equal opportunities with Swedish feminists. Peterson's thesis, which he argues is supported by a quarter of a century of quantitative research in social psychology, is that countries like the Nordic ones which have reached the highest standards in terms of gender opportunities, have produced the most unequal results in terms of actual choices, for example in the workplace. In other words, given the best possible opportunity to choose, women tend to select certain kinds of jobs as compared to men, with women usually picking jobs on the lower side of the employment pyramid and men choosing those on the top.

Peterson should have never gone there. The Swedish public, usually civilized and measured, burst into a collective bout of disdain. But the Canadian psychologist, now stained as a chauvinist of the worst kind, doubles down: his interpretation of the data is that the moment the barriers between men and women are lowered, the biological factor is decisive to explain gender behaviour and ultimately differences. Put another way, once the structural constraints disappear, natural differences between genders emerge, for example in professional settings. Plainly, this point reinforces stereotyping and discriminations, such as those that see men more inclined to relate to objects and mechanics, while women's innate sociability is reflected in jobs in the healthcare sector.

The room is cramped, the air is stale, the nylon carpet dotted with coffee stains. The setting is the Bella Center, a clumsily named conference facility in the suburbs of Copenhagen. Outside it is a freezing December evening, and the 2009 United Nations summit on climate change is just about to spectacularly collapse. The gathering in that room was not even supposed to take place: with a snowstorm incoming, the Indian prime minister had already announced his departure for the airport. But there he still is, deep in conversation with the Chinese Premier, the Brazilian president and his South African counterpart. US president Barack Obama peeps in and pops an innocent, five-word question: “Are you ready for me?” There was no space at the table, recounts a reporter, so Brazil's president “squeezed round allowing Mr Obama to pull up a chair and sit down”.

“Copenhagen” has since become a byword for global discord. Whatever the five leaders talked about back in 2009, it did not save that most hyped and inconclusive of meetings from miserable failure. The summit, colloquially known as COP15, had effectively collapsed months before it even started, under the weight of irreconcilable differences between the North and South of the world.

Climate deniers had long been at work to disparage the urgency of an agreement on carbon emissions. If not in its substance, then certainly the form the summit took was reflective of a cynical stance: I, for one, had never seen so many gas-guzzling, armoured SUVs bulldozing through Copenhagen as in those two fateful weeks. Compounding a general sense of anarchy, surprisingly poor organization left delegates by the thousand freezing outside an overbooked conference centre. Stories of heads of state unrecognized by security guards and sent to the back of the entrance queue made the rounds on the internet. To top it all, the ultimate irony during a negotiation on rising temperatures: it was absurdly cold. In the midst of this mayhem, Obama's polite request to join that conversation with the other heads of government would appear a routine act of courtesy. In reality, it better serves as the unwitting formula of the new world disorder.

The Nordics have their own Alexis de Tocqueville. In the 1930s, a young American correspondent and later Pulitzer Prize-winning journalist named Marquis Childs undertook a journey to Sweden to examine the bold new experiment being pursued there in offering a cradle-to-grave welfare state. Not unlike Tocqueville, the nineteenth-century French diplomat whose Democracy in America captured the spirit of the nascent United States, Childs's account of the emergent Nordic social model produced an unlikely classic entitled Sweden: The Middle Way (1936).

Against the background of a looming struggle between fascism and democracy, capitalism and communism, Childs’ short book chronicled the ways in which effective democratic governance could overcome ideological confrontation and deliver results. Through a detailed study of the cooperative system, Childs demonstrated how Sweden, and the Nordics by extension, fared between the “concentration of economic power in the hands of a few men” in the United States and “the trials and hardships in Russia”. While firmly in the Western camp, Sweden had somehow managed to intercept and absorb the revolutionary winds blowing from the East. The subtitle – The Middle Way – would become a cliché of centrist politics.

The book made a splash. At the time, the New York Herald Tribune reviewed it enthusiastically: “[It] reads like the best political news in years. [It] sounds gloriously like what we used to think of as American: a method of sane compromise and steady progress, each step tested by the sole criterion: does it work?” US President Franklin Delano Roosevelt, in the midst of that most ambitious of middle-way kind of experiment, the New Deal, sent a delegation to Sweden. He reasoned thus: