For those with a belief in the efficacy of free markets, this has been a dispiriting week. We have been treated to two examples of what Karl Marx once called “Capitalism red in tooth and claw.” It is an indication of the depths to which the two companies have sunk that the best description of their behavior comes from that source. The two stories are vastly different in many ways, but both show the danger of a corporate culture that eschews basic morality in the pursuit of profit. It should be noted that maximizing shareholder return is the most fundamental task of a public company, and I have nothing against that, but even the most profit-driven of executives is expected to strike a balance between that mandate and what is the “right thing” to do, either morally or legally.
Turing Pharmaceuticals, a startup company run by the controversial former hedge fund guy Martin Shkreli, has come under fire from the moral perspective. The company is, of course, perfectly entitled to buy the rights to a decades-old drug and increase the price, but in this case, a New York Times article drew attention to the practice, which has sparked a wave of criticism of Turing.
The drug in question is Daraprim, which is used to fight toxoplasmosis, an infection to which unborn babies, AIDS patients, and certain cancer patients are vulnerable. After acquiring Daraprim, Turing raised the price from $13.50 per pill to $750. For many people, given that Turing had no part in the development of the drug, that action smells of opportunism of the worst kind. The limited nature of the disease, so the logic goes, makes a generic version of the drug unlikely in the immediate future, so Turing has pricing power. You can make your own judgment on the morality of using that power to effectively hold vulnerable, sick people hostage.
Over time, of course, as any free market advocate will tell you, that decision should, at least in theory, backfire. By raising the baseline price, Turing has made it far more profitable for somebody to find an alternative. That may well happen at some point, but in the meantime, Turing makes a lot of money and there is little that the unborn babies, cancer patients and AIDS sufferers can do about that.
As I said, there is nothing illegal about what Turing did, but that is not true in the case of Volkswagen. The German car manufacturer has admitted that software in certain diesel cars was designed to circumvent emissions regulations; a clear breach of the law. For that they will be punished, with huge fines and a massive recall likely, but who knows for how long this has been going on, or what the net benefit to sales has been. If nothing else, it has tied up the capital of competitors as they try to match the performance of Volkswagen’s TDI engines legally. As we now know, that was an impossible task. When looking at this case, though, regulators should be aware that VW’s competitors have already been hurt and avoid burdensome new reporting or other regulations that would further punish the innocent.
Volkswagen should also, in theory, be punished by the market in addition to any legal ramifications. Consumers should be wary of future claims by the company and, if sufficiently enraged by their behavior, reluctant to buy anything from them. In that case the competitors of VW - GM (GM), Ford (F), Fiat Chrysler (FCAU) and the major Japanese manufacturers - should all benefit. In some small way, then the market will mete out its own justice.
The biggest problem in the Turing case, for me, is that that probably won’t happen. If anything, Shkreli’s actions and the publicity surrounding them will harm their competitors as well, leaving them with the short-term benefit of their actions and no long-term market consequences. There will be a clamor for regulation of pricing of pharmaceuticals, and regulations, particularly hastily drawn up ones, have a tendency to be broadly applied hammers rather than selective taps where needed. Whatever your political views, one fact is hard to dispute. The big pharma companies, and now the biotechs, have made enormous advances in care, saving and improving the lives of countless people. If Turing’s actions lead to anything that inhibits those firms’ ability to do that, they will have harmed us all.
It has, then, been a bad week for capitalism. To go back to Marx, his basic contention was that capitalism contained the seeds of its own destruction. The kind of behavior we have seen this week is, he claimed, an inevitable consequence of the profit motive, and when the workers have had enough of it they will revolt. We have learned to avoid that by regulating the excesses of the few, but in both cases regulators must make sure that any regulation that is sparked by the actions of Turing and VW do not inadvertently do more harm than good.