16A005 Unfettered Capitalism by Jim Davies, 2/16/2016    

In the coming zero government society there will be no fetters (laws) because there will be no government to write or enforce them; hence, those wishing to save some of what they earn and invest it for greater profit will be wholly free to do so. Many will so choose, which it why that society will fast become almost unimaginably wealthy.

Is there not, however, an ugly side to that? - all commentators I could find, this month, answer "yes", with respect to Martin Shkreli. But my answer remains "no."

Shkreli is a young capitalist whose company, Turing Pharmaceuticals, bought the drug Daraprim and raised its price immediately from $13.50 a pill to $750 a pill. Forbes, a champion of capitalist enterprise, was unable to find anything nice to say about that and even Donald Trump, a businessman now known for making outrageously un-PC remarks, called it "disgusting." The political Left was quick to shriek that Shrekli is now the "most hated man in America." I'm unaware of any surveys that confirm that ranking.

Shkreli's responses were delightful. "We have shareholders just like every other company, and our shareholders want us to maximize our profits.” Challenged, he replied “I probably would have raised the price higher" had he considered the move more carefully. “I could have raised it higher and made more profits for our shareholders. Which is my primary duty. Again, no one wants to say it. No one’s proud of it. But this is a capitalist society, capitalist system and capitalist rules. My investors expect me to maximize profits. Not to minimize them or go half or go 70% but to go to 100% of the profit curve that we’re all taught in M.B.A. class.”

The Forbes article noted that Shkreli has no MBA, so that may be his main mistake; I don't either, but suspect that such classes no longer teach that. I suspect they focus instead on social responsibility and tax optimization. A second mistake was to allege that "this is a capitalist society"; it is no such thing, alas. A third, more excusable, was his "no one wants to say it"; wrong, for I do; and maybe a few others. But Martin Shkreli may not yet have met the Zero Government Blog. I hope he soon does.

Otherwise, his conduct was admirable, and he deserves all the money he makes from it. The outcry of horror is deeply hypocritical, on two grounds.

First, most other pharma companies are doing much the same, as Forbes did point out in a highly revealing bar chart (scroll down 50%.) Of six large manufacturers, only GlaxoSmithKlyne has not been supplementing profits by raising drug prices. Not as much as Shkreli did for Daraprim, but steeply all the same. The complaint about his black kettle comes from black pots.

Second, the market response to his $750/pill price has very properly produced a plan for marketing a competitor for Daraprim @ $1 per pill, by Imprimis. Fine - that is exactly what will happen in an unfettered market whenever a profit margin is seen to be wide enough - but what was Imprimis doing for the last half century since the patent on Daraprim expired? If they could make a profit on $1 when the drug was being sold for $13.50, why didn't they?

Only one reason fits: a monopoly or cartel was at work. That's openly true for the first 17 years of a drug's market life, for the Feds grant the inventor a monopoly, called a "patent." For that period nobody is permitted to compete; and that law (or fetter) is very popular with Big Pharma. It's rationalized by the argument that the Feds also force (fetter) the maker to submit the drug to an extended period of testing by the FDA, which multiplies the cost of its preparation; all in the name of "safety", regardless of how many patients are dying for want of it while the testing proceeds. The fetter during that period is also on them. There will of course be no such monopoly in the coming ZGS.

After the patent expires anyone can compete, and resulting "generic" drugs are well known to reach the shelves at small fractions of the original price, which obliges the former patent holder to drop his too. He can still maintain a modest, premium price over that general level, on the claim that his product is the "genuine, original" article.

However that doesn't always happen, and Daraprim seems to have been one of the exceptions. Any price between $1 and $13.50 a pill would have been profitable, but none of the big makers bothered. There was no formal monopoly to stop them, so an informal, unwritten cartel must have been operating. In some cocktail lounge, representatives of the Big Six must have downed a few and agreed to let Daraprim's developer GlaxoSmithKlyne enjoy its premium profits. Possibly there were reciprocal agreements for other drugs. Possibly that's why we all notice that most drugs seem outrageously expensive.

Unfettered capitalism in a zero government society will still leave room for such informal but damaging deals, but they are always unstable. As soon as one is made, each participant has a motive to break it; and the easier it is to enter the particular market, the shorter will be its lifetime. Hence, a ZGS is the optimal arrangement, even if not perfect.

Removal of all fetters from this as from every other market will in no way relieve vendors of responsibility for negligent work; if one sells a drug that poisons his customers, the loss of his reputation, as well as the payment of resulting damage claims, may well put him out of business. But that removal will bring multiple benefits: the artificially long delay forced by FDA testing will vanish, so preventing suffering and death sometimes on a large scale, and that same time saving will slash the cost of new drug development, bringing much lower prices at launch; the chance to compete at once instead of waiting 17 years will lower them still further and much sooner.

By flouting the convention of the pharma cartel, Martin Shkreli has exposed its existence and endangered the large profits it is making at our expense. That, I think, is why its members are so indignant. Good for him.