Profiting From Market Failure
By tristero
Douglas Smith is an author, a consultant, an executive, a teacher, and one of the most astute political/cultural observers I know. Recently, he helped found Econ4, a consortium of prominent economists who seek to challenge economic orthodoxies and groupthink to develop new kinds of economic policies for the 21st century. Recently, he published an important article for the Captialism Unmasked series on Alternet entitled Profiting From Market Failure: How Today’s Capitalists Bring Bad Things to Life. Here are a few excerpts, but do read it all:
Cheerleaders of capitalism attribute failure only to government, to individuals and occasionally, to organizations – but never to markets. Yet except in the dream worlds of fact-free economists, markets are always out of balance and screwing up.
The same forces that so brilliantly coordinate resources in a global automotive market have also operated to plan obsolescence, to impede the provision of safety belts and air bags, and to obstruct the pace of fuel-saving innovation.
Clearly markets often fail in bringing us the things that make our lives better. Which raises the question: How do capitalists respond to market failures?
More specifically, to what extent do capitalists deploy their wealth in the search for new and better mousetraps? And to what extent do capitalists double down on market failures by intentionally perpetuating and profiting from the failures themselves? And, most importantly, how do the markets for gathering and deploying capital respond to failures in markets that deliver crappy products and shoddy services?
Consider Joe Wilson of Xerox, a Rochester, New York hometown boy who took the reins of the family office supplies business, learned about Chester Carlson’s invention of “dry writing,” and then bet his company and capital for 14 straight years on the promise that xerography would dramatically improve communications. Fourteen years. This was not the “fast buck, no risk” capitalism of today’s swashbuckling pirates. It was difficult, nerve-wracking, persistent and risky.Joe Wilson and Xerox reveal the persistence, focus and actual risk-taking demanded to convert market failures into market success. Such powerful forces, though, threaten incumbents. When better mousetraps emerge, some players lose. Xerox’s success pushed out carbon copies, and those who profited from them. Economist Joseph Schumpeter called this process “creative destruction.” Like water finding its own level, capital should flow to better mousetraps if capitalism is to fulfill its potential to expand “good things to life” for humanity.
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[But] take a look at healthcare markets. Instead of taking Joe Wilson-style risks on innovation, too many captains of the heathcare industry and the capitalists who fund them choose to perpetuate market failures and enrich themselves in the process. They “just say no” to the risks inherent in searching for new life-saving drugs and treatments. Ditto to opportunities to dramatically expand access to those who currently cannot afford them. For these well-off incumbents, there is simply too much profit to be made by raising prices, manipulating intellectual property protections, bribing doctors, misleading the public, cutting costs, and choking distribution. (See Maggie Mahar’s Money-Driven Medicine.)
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If you’re part of the 99 percent, take a clear, long look around. Odds are, you’ll read about people distressed from the consequences of too many market failures in housing, financial services, energy, labor, law, accounting, healthcare, insurance, transportation, telecommunications and more. Likely enough, you have shared some of this distress yourself.
Buckle up. It’s going to get worse. Having extracted so much wealth and power from exacerbating instead of fixing failures in so many markets, the lords and ladies of free-market capitalism want even more by privatizing education, prisons, parking and tolls, the military, and with Citizens United, democratic politics.
Remember this: all markets both succeed and fail. The balance between more successes versus more failures is in the hands of ethical and responsible owners and investors… like Joe Wilson, who invest capital in converting failures into good things for life. Today, those folks are losing out – badly — to people who thrive on failed capital markets that put a higher premium on perpetuating failures instead of fixing them. There is one way to fix the mega-failures in capital markets: regulation. Governments must step in now. Otherwise, capital markets free of all restraint will, as sure as night follows days, rain ever more pain on the many in order to generate wealth for the few.