You don't have to be a economist to understand why American healthcare has been such a disaster for so long -- and why Obamacare has spectacularly failed to do the one thing that would have solved most of its problems.

Because of a near-evil system in which employers are subsidized to pay health insurance premiums that the consumers of healthcare never pay, the health consumer has no incentive to shop for value. Price competition -- which is the most important mechanism by which the free market makes goods and services affordable -- is therefore eliminated. Care becomes hugely expensive as hospitals charge made-up prices that they know will be paid for by insurance companies. Not only does this system support the practicing of hugely wasteful defensive medicine, but also hospitals take every opportunity to recover from the insurance companies the cost of non-emergency care that government forces them to give for free to others who neither pay for what they use nor have their own insurance.

For the better part of a year, a pro-free-market, pro-liberty, grand-bargain solution to American healthcare has been kicking around my head, but I never wrote it down because it does not reject all government involvement in healthcare, and I rather expected that many of my libertarian readership would be disgusted by what many of them would deem a compromise of principle.

But for a reason that shall become clear, it's now time to share it. It goes something like this.

If you took the American Constitution to the UK and asked the British, "Which major government programs are consistent with the American notion that the purpose of government is to protect life, liberty and the pursuit of happiness", I'd be prepared to bet that the most common answer would be "The National Health Service", which is Britain's system of socialized healthcare.

To most American conservatives, libertarians and Constitutionalists, this would be anathema. But it wouldn't surprise Liberals.

The Brit, unschooled in the finer points of the Constitution and the Federalist papers, would no doubt point out that the NHS directly saves lives and directly promotes liberty and pursuit of happiness by completely eliminating the possibility of -- and therefore any reason to worry about -- medical bankruptcy. And so, he would say, the NHS is an example of government protection of life, liberty and pursuit of happiness.

One of the most effective principles for marketing libertarianism is used often by Penn Jillette. His standard for the use of government force is as follows. "If I as an individual cannot use force to achieve some ends, then government should not be able to do so either." This is a great way into the politics of liberty because even those who regard themselves as Liberals and Conservatives see it as a good non-ideological starting point to decent and productive discussions about big issues.

So our Brit might also propose the following to an American Libertarian, armed with Jillette's principle. Imagine someone has just been hit by a bus. A bystander screams for a doctor to help save the wounded man's life. One is nearby. But he refuses to help unless is he is paid for his services. So the bystander breaks into a nearby house, steals an expensive-looking ornament and gives it to the doctor by way of payment.

Most people would say that although the doctor may have done nothing wrong in theory, he's not a very decent guy -- and they don't want to live in a world populated by people like him. Most would also say that the violation of property rights of the homeowner was a moral act, justified by (and only by) the saving of the man's life in the street. In other words, they would say that the liberty gained by the act exceeded the liberty lost. Accordingly, by Jillette's libertarian yardstick, government action in such an example of medical catastrophe is not only moral but also consistent with freedom.

If the liberty movement is to be able to make its case in the hugely important area of healthcare, it must be able to think like the average American about life and liberty. It is a shame, then, that conservatives and libertarians have any made any government involvement in healthcare a kind of proxy for Progressivism's worst excesses -- and something to be fought against without giving any quarter. As someone who writes extensively about Progressivism's excesses, I am quite clear that having government step in to repair limbs that are hanging off bodies is not one of the worst.

But what could possibly be the principled basis for a libertarian or conservative consideration of government involvement in catastrophic healthcare? The obvious answer is that unlike all non-catastrophic care, and unlike all welfare, there is no moral hazard here: it doesn't incentivize people to get run over by buses just so they can get some of that free surgery.

Once you add in the fact that when government pays the doctor not by surprising a nearby homeowner and grabbing an ornament, but as part of the normal progressive tax system, government in catastrophic healthcare is to most people as palatable as government-funded fire brigades and law enforcement.

This brings me to the essence of my grand Libertarian healthcare bargain -- which is simply to concede socialized catastrophic healthcare only, in return for a complete free market in every other area of healthcare. This would massively drive down costs; we'd eliminate employer-paid premiums; prices would be posted by doctors; patients would have the incentive and ability to shop around for value, and no one would pay for anyone else' non-catastrophic health needs. But if you get hit by a bus or get terminal cancer, you get some guaranteed level of treatment. We could argue about how to do it, but it probably amount to the government's acting as insurer at the high end of the risk curve. Whether they do so directly, or through insurance corporations could be determined. In this system, no one dies for lack of catastrophic care; there is no more medical bankruptcy, and 90% of the healthcare becomes a pure free market. Libertarians and conservatives get 90% of what they rightly stand for. And if you don't like the government's catastrophic coverage, you can still keep your own private policy.

I call this a "grand bargain" because for libertarians, the upfront concession of socializing any part of healthcare is extraordinary to contemplate. And I never wrote it down because I thought I knew what response I would get from my own side: I would be reminded that all tax is theft because violence against property rights is the moral equivalent to other forms of aggression; that any government involvement in our lives is a compromise of liberty per se; that if you concede the principle anywhere, you concede it everywhere.

All of those things can indeed be argued. But the proposal has four critical benefits. First, it is really easy to understand; second, it would get massive popular support and so could actually be implemented; third, it would massively increase liberty in healthcare relative to the current situation, and fourth, it would make the liberty movement that proposed it seem not at all like those callous Libertarians who everyone knows are happy to let the poor and weak die on the street ...

One might even suspect that were a party that were to propose it officially might be simultaneously trying to win elections and make realistic policy proposals that could actually get adopted.

You will imagine my surprise, therefore, when I was followed last weekend as a speaker at the Annual Convention of the Libertarian Party of Washington State, by the Libertarian Party's Vice Presidential candidate for 2012, Judge Jim Gray, articulating an approach to healthcare that was entirely consistent with this pragmatic, politic and entirely unorthodox compromise.

After all, said the Judge, "We are the classic liberals".

Judge Gray's speech was one of the most exciting speeches I'd heard from a Libertarian in a long time -- not because I learned anything new about their philosophy -- but because, if the Libertarian Party is now thinking this way about policy, it could be in grave danger of being taken seriously, at last.