Martin Shkreli, hedge fund manager and founder of Turing Pharmaceuticals, has been described as the “most hated man in America” and an example of “everything that is wrong with capitalism” due to his company’s acquisition of the rights to the drug Daraprim and the jacking up of the price from $13.50 to $750 per pill. While incentives (a word typically associated with capitalist rhetoric) obviously played a role, it may not be due to the supposed exploitative underpinnings of capitalism and for-profit business. Blogger Will Wilkinson makes a number of important points over at the Niskanen Center on the perverse incentives created by regulation:
Bringing a copy of Daraprim to market would require filing an Abbreviated New Drug Approval with the FDA…The FDA is notoriously slow and the process is expensive…Shkreli was willing to pay such a huge sum because he could see that no Daraprim copies were in the regulatory pipeline, meaning that, for a time, he would have a monopoly and could reap monopoly profits by callously demanding exorbitant prices from patients who have no alternative to the drug. The scandal of Martin Shkreli’s profiteering tells us very little about capitalism, per se, but it does tell us a lot about the perverse market incentives that overzealous regulation can create.
Drawing on an argument made by economist Alex Tabarrok, Wilkinson points how difficult it is to get a generic drug approved in the U.S., noting that “it’s illegal to sell imported generic versions of the drug that have not been independently approved by the FDA. Some of these generic brands have been blessed by European countries with perfectly sane and safe drug approval processes, but the U.S. won’t recognize foreign vetting, and insists on wasting resources, time, and lives with redundant oversight…If “capitalism” is a system of competitive markets in which prices adjust with supply and demand, then it definitely wasn’t capitalism, in that sense, that led Shkreli to charge $750 for something that costs pocket change on a free market. The culprit is a regulation…that makes it illegal for Americans to buy well-tested, imported generics on the open market.”
Finally, he places growing inequality at the feet of rent-seeking:
In an important new essay in National Affairs, Steven Teles, a political scientist at Johns Hopkins, points out that a fair number of the top 1% of earners owe a sizable part of their incomes to regulatory barriers to entry. Doctors, dentists, and lawyers all profit from licensing schemes that limit competition. Car-dealerships are, more or less, politically-granted concessions protected from competition. Government contractors and consulting firms that specialize in regulatory compliance reap outsized gains from heavily politicized markets. “[R]ents are pervasive in the fields of finance, entertainment, and technology,” Teles observes...[I]f Teles is right, regulation-loving progressives will need to reconcile themselves to the fact that the economic inequality and injustice they deplore may be driven in no small measure by regulations they might otherwise favor. This suggests that fighting inequality requires more than taxing America’s Martin Shkrelis more heavily—though it may require that, too. Pushing for a more equitable economy also means pushing for reforms like ending the ban on the importation of prescription drugs that have been deemed safe by, say, Canada or Germany. Which is to say, well-targeted “deregulation” is the egalitarian’s friend.
Wilkinson concludes by stating that “Martin Shkreli’s brazen legal fleecing would be impossible in an unfettered market. He bought himself a monopoly made entirely of health-and-safety red tape.” And while outrage is warranted, “we ought to be outraged also because Shrkeli’s racket is a straightforward consequence of stupid over-regulation and symptomatic of the way badly fettered markets generate injustice.”
An illustration of confirmation bias? You read Teles as placing inequality at the feet of rent seeking. I read Teles as placing inequality at the feet of capture (capture of the state by capitalist interests). There’s something to be said for both characterizations, but the political rhetoric changes (are we promoting capitalism? or bashing capitalism?) and the prescription changes. Should we seek less regulation? Or better regulation? Acknowledging that “better” is often the same as “less” (in my opinion) the project and the process are different. I think Teles mostly advocates for better, not to eliminate regulation but to offset or reduce the effect of capture.
While I don’t have a position on this question, I think I can sympathize with those who blame capitalism well enough that I’ll try to make their view seem more plausible. The problem they see is that people are motivated to make money any way they legally can. No laws are perfect, and everything is going to have edge cases which can be manipulated. A society with a strong culture of obeying the spirit of the law would leave corporate decision-makers inclined to avoid such monopolistic abuses, and consumers inclined to punish those which didn’t. In the case of medications, the second option is unreasonable to expect of potential consumers, making the cultural mores of the executives even more crucial.
The problem is that the corporate form on which capitalism relies makes such moral behavior illegal. Corporate officers have a fiduciary duty to their stockholders to maximize shareholder value. If there’s a legal option for making massive profits, they can be sued for failing to take it. In a culture which lionizes, rather than merely employs, capitalism, the behavior of such CEOs becomes not merely normalized, but extended to the rest of society as a goal to which to aspire. Sure, it would be great if the regulation allowed for relying on the regulation of other countries, but that doesn’t escape the problem, it merely puts it out of our political reach while ignoring the underlying issue of culture.
I’m not convinced by this, but the way fiduciary duty works does sound deeply weird to me on a superficial level. Maybe in practice it’s fine, but this kind of thing makes me interested in the exploration of forms like the “public benefit corporation”.
“I read Teles as placing inequality at the feet of capture (capture of the state by capitalist interests).”
You seem to be using “capitalist” as a synonym for profit or gain or more extremely greed. But these things existed long before the emergence of modern capitalism. And most governmental systems and societies were based on the this “capturing” of the state by the elite.
“I think Teles mostly advocates for better, not to eliminate regulation but to offset or reduce the effect of capture.”
Efficient and effective regulation is a must. It creates the environment and legal system in which markets operate. The problem is that many times regulation is neither efficient or effective in achieving its intended ends.
“The problem is that the corporate form on which capitalism relies makes such moral behavior illegal.”
While I’m convinced that most businesses most of the time are an incredible benefit to society, I’m also convinced that business leaders tend to be very anti-market, anti-competition.
Re “these things existed long before”: “They did it first” is seldom an effective defense.
Private ownership (which is all we really need to talk about “capitalism”) in any dynamic system will seek to co-opt the system to enhance profits. That’s all we mean by “capture”. It’s hardly controversial to observe that it happens. The stronger proposition is that the tendency toward capture–a (non-unique) characteristic of capitalism–is not self-regulating but rather ought to be managed or constrained externally. I’m not sure there’s any disagreement here, but I make the simple point that, by my read, Teles says “yes”. And that strikes me less a defense of capitalism and more a “making it work” prescription.
Does it matter? I think so. You say the problem is that many times regulation is neither efficient nor effective. I say that a problem is that sometimes regulation is captured. They are probably both true, both at the same time, and even synonymous much of the time. But stating the problem has a bearing on the solutions we seek and find acceptable, and so it matters how we state the problem.
““They did it first” is seldom an effective defense.”
That would be true if that were the defense, but it isn’t. At least, not as I understood your point. As I said above, your comment struck me as using “capitalist” as a synonym for greedy profit. Similarly, you seem to suggest that it is “capitalism” and “private ownership” that seeks to “co-opt the system to enhance profits.” Yet, at the same time, you acknowledge that this is a “(non-unique) characteristic of capitalism.” My point was that greed and the lustful acquisition of power is a norm of human history and is part of human nature. It isn’t people are greedy because capitalism (social science actually suggests quite the opposite). People are greedy, period. And yes: they seek to capture power by various means. The question then becomes *how can we prevent this to the greatest extent possible?*
“And that strikes me less a defense of capitalism and more a “making it work” prescription.”
I don’t really have any qualms with this. Making the market more competitive and less prone to cronyism is a good thing. I’m not much of a fan of state-sponsored Big Business or cronyism.
“I say that a problem is that sometimes regulation is captured.”
To clarify: regulations may be very effective and efficient at achieving the *actual* intentions of businesses and legislators. They are often not effective or efficient in achieving the *rhetorical* intentions: the public good.
“They are probably both true, both at the same time, and even synonymous much of the time. But stating the problem has a bearing on the solutions we seek and find acceptable, and so it matters how we state the problem.”
Well put.