Doctors and Money: The Concept of Money and the Free Market

There’s a myth surrounding physicians and money, based largely on fact, and no doubt many of you may have heard it.  And that myth has become a beacon for all sorts of disingenuous, exploitative people who view doctors as large whales, belly-full of money, ready to be harpooned as easy prey. 

The myth is doctors are rather ignorant when it comes to money.  The myth also goes that doctors have loads of money and are itching to spend it away.  Tap into a doctor like a large keg of beer and just watch all those dollars and cents (not to mention what little common financial sense) freely ooze out for everyone to grab!

As I said, this myth is based on some degree of fact.  Physicians are notoriously bad when it comes to money.  Not all physicians, mind you.  But there are lots of them, and I daresay perhaps at a percentage greater than the general population.  Doctors often make bad choices in investments, spend too much on unnecessary luxury items, and go into far too much debt (aside from their student loans).  Many find themselves in dire financial conditions owing too much money and owning too little tangible assets, despite working for years and earning huge incomes.  Why is this?  How does this happen?  Doctors are responsible people.  They care for the sick and dying for God’s sake!  How can they be irresponsible when it comes to money?

The answer: because many doctors themselves believe in the myth.  They fall prey to what the exploiters tell them, to what they see in the media, to what they view as common wisdom--that their occupations as doctors will richly reward them with loads of money, year after year.  Heck, doctors more than most any other profession suffer through years of delayed gratification during a long and grueling period of schooling and training.  So when they finally make money, many docs spend more than they can afford on things they don’t need and save or invest little to nothing, in the anticipation that future income will always support their lifestyles.  Yet there will come a time when the doc cannot work as long or as hard later in life and finds he has little savings and too few assets to support him into retirement.  The problem is, once a feel-good behavior is done once, it is repeated, and if repeated too often becomes a habit.  And habits, like smoking and video games, are hard to break.

Thus, it behooves doctors to learn about business.  We live in a capitalistic society.  And it’s not just in the United States.  The world is largely a free-market system.  Even outside the U.S. and in countries with socialized medicine, their healthcare systems are run as businesses; it is the business mindset that allows them to exist at all.  It takes money to provide services to people in need as well as any other service or product.  Money is the driving force behind all of this.  And when we discuss the function of money, we’re talking about business.  

Like it or not, we live in a free market world.  No matter what the political or philosophical leanings might be, people gravitate to a free-market mentality when dealing with one another in economic terms, when exchanging things of value or valuable services with one another.  Money is important in a free-market system.  Even in the field of medicine.

“Money?”  you may ask.  “Why must we deal with money?  I went into medicine to serve humankind.  Money is secondary.  By the way, isn’t money the source of all evils?”

Answer: well, yes and no.  Money is required in a free-market system.   It serves as a medium of exchange.  The reality of the world is that it revolves around money and the free-market.  Even in the field of medicine.

So, what exactly is money and why does it have such power over us?

Money and the free-market developed from a natural process or an evolution, so to speak.  Before the invention of money, the free-market started with the barter system where people traded actual stuff or services with one another, only it was difficult to compare value in this way.  

Following is a little story to illustrate the barter system, and bear with me the historical inaccuracies.  Let’s say we’re living in ancient times, a long, long time ago.  Assume I’m a blood-letter by profession, which was considered a noble undertaking back in those days.  This occupation was also known as a barber, the early surgeon.  Let’s say you’re really sick and you really need my services to get well, since blood-letting was the accepted practice to cure people by releasing all those bad humors known to cause anything from the common cold to leprosy.  You offer to pay me a goat after I provide you with my fine surgical skills as a blood-letter (notice even back in those days people paid the doctor AFTER the service was rendered.  Times have not changed).  I accept your price and we agree to the transaction.  We have done business.

So, I drain a gallon of blood from you.  After this service you say, “Boy doc, I feel great—maybe a bit lightheaded—but great nonetheless!  Here’s a goat in payment.”  This seems like a fair trade.  My family will have goat milk, we’ll make goat cheese, the kids can play with the goat and some day in the future we can eat the goat.

But the next guy who needs a good blood-letting doesn’t have a goat but offers to pay me a bag of potatoes, because he’s a poor potato farmer working as a serf on an acre of land owned by some rich aristocratic goat farmer who owns the land, and who charges the potato guy 80% of his harvest as rent.  A bag of potatoes is thus very valuable to him.
But I ask, “Does a bag of potatoes have the same value as an entire living and kicking goat?”  How many potatoes is a goat really worth?”  To some a goat is worth a whole lot more, to others (like a vegan) a goat is totally worthless.

You can see it’s difficult to compare value in this way.
People later based value on more standard measures, using known amounts or weights of rare substances such salt (yes, salt was quite rare at one time) and then rare precious metals for trade.  Since these were difficult to come by but easily recognizable, and could not be manufactured from other common substances, value was assigned to such things and they could be counted and carried very easily.  Value was then assigned to all the various goods and services based on these precious items.  That’s how currency evolved.  Gold or silver was weighed out, but as you can imagine, this could be cumbersome.  To eliminate the task of weighing these substances with each exchange (and also risk losing some or all of the precious metals if someone perchance sneezed and scattered your gold dust all over the place) these metals later were melted and fashioned into coins with known, specific weights.   This way there is no need to measure or weigh the metal each time a trade occurred.  The units of measure for the coins are then given their own, unique name, like Drachmas for instance.  (A Drachma was an ancient Greek silver coin).

Thus, coinage helped standardized how rare commodities were measured and then used for trade. 

Aside:  Do you know why some coins have fine ridges on their edges?  To prevent people from shaving metal off the edges of coins and amass these into a nice collection of precious metal to sell.  Each shaved coin had less metal and thus less value, especially if it was noticeable or weighed again.  With ridges, you could tell if someone was being dishonest with the currency.  Yes, people even way back then could be pretty sneaky.

So now we have a standard system of money.  Money is a medium of exchange for goods and services.  And a precious metal in the form of a coin serves as that medium.  The coin becomes a store of value.

I now value my blood-letting services at 10 Drachmas in silver coins.  The guy down the street charges 15 Drachmas, so I end up attracting more business because I’m cheaper.  I figure I could raise my price to 14 Drachmas and make more money doing the same amount of work and still be cheaper than my neighboring barber.  However, my business drops since the other guy afterwards sneakily drops his price to 13.  I then drop my price to 12 to compete with that competitive little snot.  There comes a time where a point of equilibrium eventually is reached, where we cannot charge too little such that it becomes unprofitable for either of us to provide the service, nor can we charge too high since fewer people could afford our services and we won’t attract business.  Prices go up and down until an equilibrium price is reached.  The price eventually reaches an equilibrium of, let’s say, 12 Drachmas.  People are willing to pay this price for either one of us, assuming we are relatively equal in skill and bedside-manner.  (And then the insurance companies and government get involved and really mess things up, but that’s altogether another story).

Likewise, the goat sellers will set their prices and the potato people the same, and all this is based a universal coinage system.

So how did paper money come about?  One day a guy owes me 12 Drachmas for my bloodletting services.  But he doesn’t have the actual Drachma silver coins so he writes me a Note or IOU, which literally means “I Owe You.”  This note essentially is an official document promising to pay me 12 Drachmas in the future.  We then call it a “12-Drachma Note.”  Now I need to buy bread and beer for my family so I go to the Bread & Beer Barn, but I don’t have my 12 Drachmas in silver coinage yet.  So I hand my 12-Drachma Note to the Bread & Beer vendor and say, “Hey Bud, Nero owes me 12 Drachmas but the bum didn’t have the coins, so he gave me this note instead.  So can I buy 12 Drachmas worth of bread and beer and you later get the dozen Drachmas from Nero?”  Of course, the vendor, Bud, says “yes” since he wants to make a sale.  Otherwise I’ll walk away to his competitor, Brie, at the Cheese and Wine Shack and she’ll gladly take the note, ‘cause she’s a budding entrepreneur and has been itching to put Bud out of business. 

Later, Bud uses this same 12-Drachma note to buy some yeast from Candace at the Candida Center to make more bread and beer.  He knows that a Roman legion is coming to town next week and they spend money like drunken fools, so he needs to be prepared and bake a ton of bread and brew barrels upon barrels of beer so he can sell it to those Romans.

You see how this works?  Notes like this then circulate as currency. This allows people to do business where they otherwise could not.  They were all able to engage in trade more quickly.

Later, the government takes over and regulates this, but then simply prints more of such notes that circulate as money.  There was a time years ago where our U.S. Paper currency stated, “Legal tender for all debts public and private and redeemable for lawful money at the US Treasury”, which in those days was gold or silver (the latter were called “silver certificates”).  Our paper money no longer says this but rather: “Legal tender for all debts public and private.”  So the paper currency in itself has intrinsic value but with nothing to back it up.  Governments around the world have done the same for the most part. 

Money is redefined as any item or record of verifiable value that is widely accepted as payment for goods or services.  Money in this form becomes more ubiquitous and allows for far greater and quicker transactions. 

As you can see, there is a purpose for money.  There is a reason for the free market system for doing business.  And the world of medicine too works within this business model.  We will discuss more about business and money matters in later posts.

©Randall S. Fong, M.D.