A very False Profit topic will be discussed at this week’s “Journal Club”: the idea that capitalist patterns can somehow be applied to eliminating poverty at a higher rate than capitalism in its current incarnation. It starts in about fifteen minutes; I’ll post notes here, later. For now, here are links to our required reading:

• An essay by Muhammed Yunus
• Bill Gates’ speech at Davos (or, watch it on Youtube)
• there’s also a William Easterly critique of the Bill Gates speech that I’ll link to, soon

Update: I may or may not be able to write more about this. David Grosof, our extremely overeducated presenter, rattled off ideas and manged discussion at a rate that I didn’t even try to capture in note form. Most likely, interested parties will have to catch me in person to start up the discusison. I’ve included his initial prompt for discussion, after the jump.

To be discussed: Is Yunus right? What institutional, legal, cultural and financial structures need to be built to create a social business sector? To what extent are conventional (”non-social” profit-maximizing) businesses in fact guided by non-pecuniary (not money-only) motives? (To what extent are existing non-profits in fact guided by non-pecuniary motives?) What can be learned from the history of value-driven businesses like Ben & Jerry’s, which was acquired by monster multinational Unilever?

Note: In my opinion there is a big mistake on Yunus’ first page about the degree to which economic theory predicts that markets will fail often and alot. His is a misleading caricature of economics. I am objecting because I think more accurate economics is really helpful in grappling with systemic problems in current capitalism that social businesses might address.

Therefore, I encourage you to take a look at the three external links on the wikipedia page about “Market Failure” and find one of the appropriate depth and scope to satisfy your interests about the many many ways that markets fail. The wikipedia page (which I don’t like much) is here: http://en.wikipedia.org/w/index.php?title=Market_failure&printable=yes and the three links are:

* BasicEconomics.info - Market Failures and Externalities
* A discussion of market failure
* Market Failures - in Price Theory: An Intermediate Text by David D. Friedman

If you know you’re too lazy to even check those out, here are four examples of how markets fail in healthcare technology, my special focus.

1. A last-line antibiotic, to be used as a last resort when others fail, has a medical value that depends on strict rationing of its use to forestall the development of drug-resistant microbes. The incentive to develop these incredibly important drugs is poorer than the incentive to develop a less innovative variant of existing antibiotics, whose usage is wider and whose revenues and net profits are much greater. The economic incentive is in fact to avoid designation as a last-line antibiotic, which means fewer sales and costly regulation! The incentive to not develop, and if developed, to encourage misuse and overuse of a last-line antibiotic in order to drive more unit volume is at odds with key public health needs. The market will underproduce one of the most important categories of therapeutics. Comment and question: many people regard the development of antibiotics as the greatest, most beneficial invention of 20th century industrial society. Is screwing up the upgrade of one of mankind’s most essential toolkits by over-reliance on profit-maximizing business sign of a fundamental flaw? .

To the extent that a last-line antibiotic is a “public good” or has key “network externalities,” do you think that governments should contract with drug companies to develop and make antibiotics, which are then owned and controlled entirely in the public interest by governments? If government isn’t democratic (complete with free speech and open media, not just electoral process), does that change your view?

1. When a drug goes off patent and several generic firms enter the market, no one generic firm has incentive to advertise (because the benefits of increased generic sales are shared among all that firm’s generic competitors) and the market fails to deliver enough information to patients and prescribers about the value of generics. Generic adoption is slower than optimal as a result. (I will tell you how I think US regulators decided to deal with this problem.)

2. Getting vaccinated against an infectious disease not only protects the person being vaccinated but also those in her community, because it makes it harder for infections to spread. This is a classic “network externality.” Because people don’t get paid by their neighbors to get vaccinated for protecting them, markets fail to price vaccines properly according to the benefits that are distributed both to the community and the individual and the risks/costs borne by the individual getting vaccinated. The person receiving the vaccination usually has in mind her own personal benefits only — and only the patient’s own risk of adverse side effects and pain; therefore, not enough vaccinations against infectious disease are consumed. This is one reason why governments justify forcing people to get vaccinated, to correct this market failure and to prevent people from “free-riding” on the protection of others while avoiding the expense, risk and pain of being vaccinated. Because vaccines are systematically underpriced, there has been underinvestment in them, even though it is widely recognized that vaccines are perhaps the most important and cost-effective inventions of all time. Period.

3. More resources go into addressing vanity needs of rich people (hair loss, zits, liposuction, laser eye surgery) than addressing deadly tropical diseases like malaria and pediatric diarrheal diseases that affect many more poor people much more severely. Resources are used that way because businesses using markets care about dollars, not people. Markets are one dollar, one vote. Poor people don’t count as much. (Major monotheistic religions say one person, one soul made in the image of God, worthy of compassion and love.) Though this imbalance in resource allocation was obvious and known for decades, a non-profit pharmaceutical firm, the Institute of One World Health, was created only in the late 1990s for the first time, primarily financed by the Gates Foundation. Wasn’t that the World Health Organization’s job? WTF?

Related Posts:

• Barbarians at the Helm (July, 2006)
• Tata unveils its new Nano (January, 2008)
• Kiva vs. Microplace (November, 2007)
• Saving the Planet With Plan B 2.0 (March, 2006)
• HASA (June, 2008)

This entry was posted on Friday, February 8th, 2008 at 10:46 am and is filed under economics, notes, profit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.